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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1993
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-5965
ICN PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-2565381
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3300 Hyland Avenue, Costa Mesa, California 92626
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (714) 545-0100
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- -------------------------
Common Stock, $1.00 New York Stock Exchange
par value Pacific Stock Exchange
12 7/8% Sinking New York Stock Exchange
Fund Debentures
due July 15, 1998
Securities Registered Pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's voting stock held by
non-affiliates on March 29, 1994 was approximately $178,581,000.
The number of outstanding shares of Common Stock as of March 29, 1994 was
20,528,931.
Portions of the Registrant's definitive Proxy Statement for its 1994
Annual Meeting of Stockholders are incorporated into Part III of this report by
reference.
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TABLE OF CONTENTS
PART I ITEM NUMBER AND CAPTION PAGE
----------------------- ----
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 16
4. Submission of Matters to a Vote of Security Holders. . . . . . . . 18
Executive Officers of the Registrant . . . . . . . . . . . . . . . 18
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . 21
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . . 23
8. Financial Statements and Supplementary Data. . . . . . . . . . . . 33
9. Changes in and Disagreements with Auditors on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . . .110
PART III
10. Directors and Executive Officers of the Registrant . . . . . . . .110
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . .110
12. Security Ownership of Certain Beneficial Owners and Management . .110
13. Certain Relationships and Related Transactions . . . . . . . . . .110
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. .111
(i)
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PART I
ITEM 1. BUSINESS
GENERAL
ICN Pharmaceuticals, Inc., its subsidiaries and a 39% owned equity
investment ("ICN" or the "Company") develop, manufacture, distribute and sell
pharmaceutical and nutritional products, research chemical and cell biology
products and related services, biomedical instrumentation and immunodiagnostic
reagents and instrumentation. The Company's pharmaceuticals group is composed
of a subsidiary and an equity investment: (i) Viratek, Inc. ("Viratek") (ICN's
63%-owned subsidiary, as of March 17, 1994), which conducts clinical research
and development on compounds derived from nucleic acids, including ribavirin
(VirazoleR), a broad spectrum antiviral agent, and (ii) SPI Pharmaceuticals,
Inc. ("SPI") (ICN's 39%-owned equity investment, as of March 17, 1994), which
manufactures, distributes and sells over 1,000 pharmaceutical and nutritional
products, including anti-infectives, dermatologicals, medicated nutritionals
and vitamins, anticholinesterases and vision care products in the United
States, Yugoslavia, Mexico, Canada and Western Europe. The Company's
biomedicals group consists of ICN Biomedicals, Inc. ("Biomedicals") (ICN's
69%-owned subsidiary as of March 17, 1994), which manufactures and distributes
research chemicals, cell biology products, chromatography materials,
immunology instrumentation, environmental technology products, precision
liquid delivery instrumentation and immunodiagnostic reagents and
instrumentation in the United States, Canada, Mexico, Europe, Australia and
Japan. Biomedicals also purchases research chemicals from other manufacturers,
in bulk, for repackaging and distributes biomedical instrumentation
manufactured by others.
The shares of ICN's common stock, $1.00 par value ("Common Stock"), are
traded on the New York and Pacific Stock Exchanges under the symbol ICN. The
shares of common stock of Viratek, SPI and Biomedicals are traded on the
American Stock Exchange under the symbols VRA, SPI and BIM, respectively.
The Company and its then consolidated subsidiaries changed their fiscal
year end from November 30 to December 31, effective for the twelve months ended
December 31, 1991. All fiscal years prior to 1991 have not been restated and
are shown as the twelve months ended November 30.
ICN controls Viratek and Biomedicals through stock ownership, voting
control and board representation and is affiliated with SPI. Certain officers
of ICN occupy similar positions with Viratek, SPI and Biomedicals. In
addition, certain officers and directors of ICN own common stock or have
options to purchase substantial numbers of shares of common stock of Viratek,
SPI and Biomedicals. ICN, Viratek, SPI and Biomedicals have engaged in, and
will continue to engage in, certain transactions with each other. Viratek and
SPI have entered into certain licensing and marketing agreements with each
other. Viratek, SPI and Biomedicals sublease space from ICN, and are parties
to certain financial arrangements with ICN. There are potential conflicts of
interest inherent in such relations and transactions. An Oversight Committee
of the Boards of Directors of ICN, Viratek, Biomedicals and SPI was formed to
review transactions between or among the four corporations to determine whether
a conflict of interest exists among them with respect to a particular
transaction and the manner in which such conflict should be resolved. The
Oversight Committee consists of one non-management director of each corporation
and a non-voting chairman. The Oversight Committee has advisory authority
only. See Notes 2, 3, 4, 5 and 6 of Notes to Consolidated Financial
Statements.
During 1993, 1992 and 1991, the Company sold 272,500, 348,000 and 200,000
shares, respectively, of Viratek common stock for an aggregate sales price of
$3,325,000, $5,243,000 and $2,790,000, respectively, in open market and
privately negotiated transactions. In addition, in February and March, 1993,
Viratek successfully completed an offering in which Viratek issued 1,581,250
shares (including the exercise of overallotments). In August 1993, a total of
1,366,642 shares were issued by Viratek upon the exercise of warrants. Due to
the above transaction and the exercise of employee stock options, ICN's
ownership of Viratek has been reduced from 83% at January 1, 1991 to 63% at
December 31, 1993.
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As a result of sales by the Company of shares of SPI common stock
during 1992 and 1993, its ownership has dropped from 57% at January 1, 1992, to
48% at December 31, 1992, and to 39% at December 31, 1993. Accordingly, SPI was
deconsolidated effective December 31, 1992, and the investment is accounted for
by using the equity method of accounting. The Statements of Operations for
1992 and 1991 include the results of SPI on a consolidated basis. See "Item 1:
Business-Recent Events" and Note 18 of Notes to Consolidated Financial
Statements.
The Company has been named as a defendant in certain consolidated class
action lawsuits relating to ribavirin and the Company's businesses. See "Item
3. Legal Proceedings."
ICN was incorporated under the laws of California in 1960 and in October
1986 reincorporated under the laws of Delaware. ICN's principal executive
offices are located at 3300 Hyland Avenue, Costa Mesa, California 92626,
telephone (714) 545-0100.
RECENT EVENTS
During 1991, ICN sold 2,978,250 shares of SPI common stock for an
aggregate sales price of $50,863,000, resulting in a net gain of $27,239,000
and used 1,468,000 shares in the acquisition of Galenika (see Note 6 of Notes
to Consolidated Financial Statements). During 1992, ICN sold 690,400 shares of
SPI common stock and Galenika sold 1,200,000 shares of SPI common stock,
transferred in 1991, for an aggregate sales price of $44,608,000, resulting in
a net gain to ICN of $32,952,000. During 1993, ICN sold 1,618,200 shares of
SPI common stock for an aggregate sales price of $19,995,000. The above noted
sales of SPI stock have reduced ICN's ownership of SPI from 57% at January 1,
1992, to 39% at December 31, 1993. Accordingly, SPI was deconsolidated from
the Company as of December 31, 1992, the approximate time ICN's ownership fell
below 50%. The continuing investment in SPI was classified in the consolidated
balance sheet as a long-term investment of the Company at December 31, 1992,
and income or loss was recognized using the equity method of accounting during
1993. Prior year results have not been restated.
On October 21, 1992, SPI announced that it had concluded an agreement
with the Leningrad Industrial Chemical and Pharmaceutical Association to form a
pharmaceutical joint venture in Russia, ICN Oktyabr, in which SPI will have a
75% interest. The new joint venture was registered with the Russian Federation
on March 9, 1993. The joint venture represents a new business, and not the
acquisition of the existing business or assets of Oktyabr. Business operations
of the joint venture will commence on the completion of a business plan.
Oktyabr, which recently was privatized, will contribute output from its current
production facilities. SPI's contribution will be management expertise,
technology, equipment, intellectual property, training and technical assistance
to the new joint venture. Because of the transition of the Russian economy
into a free market oriented economy, SPI plans for a gradual phase-in of the
joint venture in 1994 and 1995. During this phase-in period, the joint venture
will develop training and marketing strategies and begin constructing a new
manufacturing facility in 1995 that is scheduled to be fully operational in
1996. Because of this phase-in period, SPI does not expect any current
material effects on its operating results, as well as, its capital resources and
liquidity.
In addition to the joint venture, on March 24, 1994, SPI entered into an
Agreement with the City of St. Petersburg to acquire 15% of the outstanding
shares of its joint venture partner, Oktyabr, in exchange for approximately
30,000 shares of SPI's common stock. As part of this Agreement, SPI may
qualify to receive newly issued shares of Oktyabr pursuant to Russian
privatization regulations that will raise its total investment in Oktyabr to
43%. The issuance of these additional shares is subject to approval and
completion of an "investment plan." The completion of the investment plan will
not require any additional financial resources of SPI. SPI has also extended an
offer to the employees of Oktyabr to exchange their Oktyabr shares for SPI
shares. The Oktyabr employees currently own approximately 33% of the
outstanding shares, however, the number of employees that will exchange their
shares is uncertain. In the event that SPI qualifies under the investment plan
to raise its investment to 43%, it is possible that a sufficient number of
employees might exchange their Oktyabr shares for SPI shares so that total
SPI investment in Oktyabr would exceed 50%. If this event occurs, SPI would be
required to consolidate the financial results of Oktyabr into the financial
statements of SPI.
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50% of the outstanding shares of Oktyabr, which would require consolidation of
Oktyabr into the financial statements of SPI.
Effective May 1, 1991, SPI formed a new joint company with Galenika
Pharmaceuticals headquartered in Belgrade, Yugoslavia. The joint company, ICN
Galenika ("Galenika") is 75%-owned by SPI and 25%-owned by Galenika Holding
("Galenika Holding"). In connection with the joint venture, SPI contributed
cash of $14,453,000, an obligation to pay $13,550,000 and ICN, on behalf of
SPI, contributed 1,468,000 shares of common stock of SPI, which was owned by
ICN, and intangible assets, including pharmaceutical compounds and related
patents and licenses. The fair value of the SPI shares transferred to Galenika
was $38,528,000, which was recorded as a liability due to the Company. The
cost basis of the SPI shares transferred to Galenika were $11,555,000.
During 1992 and 1991, Biomedicals initiated a restructuring program
designed to reduce costs and improve operating efficiencies. (See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 14 of Notes to Consolidated Financial Statements.)
RIBAVIRIN
Ribavirin is a broad spectrum antiviral agent with demonstrated clinical
utility against a variety of both DNA-containing and RNA-containing viruses.
As of December 31, 1993, ribavirin has been approved for commercial sale in
over 40 countries in various formulations for various indications. Within the
United States, Canada, and most of Europe, the approved form and use is
presently limited to aerosol treatment of hospitalized infants and young
children with severe lower respiratory tract infections due to respiratory
syncytial virus ("RSV"). In other countries, ribavirin has been approved for
treatment of one or more of the following: herpes simplex virus, varicella
zoster virus (which causes both chicken pox and shingles), exanthemas diseases
(chicken pox, measles), influenza, hepatitis, human immuno-deficiency virus
("HIV"), and hemorrhagic fever with renal syndrome.
The mechanism of action of ribavirin appears to involve more than one
process, the importance of which varies depending on the specific virus-host
interaction involved. In general, the action of ribavirin is virustatic,
leading to interruption of viral replication, rather than virucidal in which
the virus would be killed directly. Depending upon the virus involved,
virustasis is accomplished through inhibition of proper mRNA capping, direct
inhibition of certain virus-specific enzymes, or both.
Viral mRNA capping is required by many viruses for efficient binding of
viral genomic "message" to host cell polysomes and therefore for efficient mRNA
translation into proteins. Test results indicate that viral protein synthesis
is significantly reduced in the presence of ribavirin at therapeutic levels
with no observed effect on normal host cell protein synthesis.
Certain viruses encode enzymes in their genome which are required for the
virus to replicate. Direct inhibition of such enzymes without affecting host
cell enzymes prevents or inhibits viral replication. Examples of viral enzymes
inhibited by ribavirin are influenza encoded RNA dependent RNA polymerase, and
HIV encoded reverse transcriptase.
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To date, the Company is aware of no reports of virus mutants that are
resistant to inhibition by ribavirin. The emergence of resistant strains of
micro-organisms and viruses to widely used therapeutic drugs is a common
problem and the Company believes that the apparent lack of this development is
an important beneficial feature of ribavirin, particularly when considering
possible long-term therapy for diseases such as hepatitis C.
Management believes that the most commercial potential for ribavirin in
the near term is in the treatment of hepatitis C, RSV, and influenza.
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ACQUISITIONS
Since 1982, the Company has engaged in an ongoing review of potential
acquisitions of compatible businesses. The table below summarizes acquisitions
completed during the past five fiscal years by the Company. For additional
information regarding acquisitions, see "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operation" and Note 6 of Notes
to Consolidated Financial Statements.
Acquisition
Company Acquired Location Date Business Purchase Price
- ---------------- -------- ----------- -------- --------------
Galenika Belgrade, May 1991 Pharmaceuticals $58,301,000, consisting of cash of
Pharmaceuticals Yugoslavia $14,453,000, an obligation to pay $13,550,000,
1,200,000 unregistered shares of SPI common
stock issued to employees, and 1,468,000 shares
of SPI common stock plus estimated acquisition
costs of $3,000,000.
Flow Laboratories, McClean, November 1989 Biomedical $37,700,000, including $35,700,000
Inc. and Virginia products cash and bonds and 100,000 shares
subsidiaries; of Biomedicals common stock plus
Flow Laboratories estimated acquisition costs of
B.V. and $2,358,000.
subsidiaries
INDUSTRY SEGMENTS
ICN operates in two industry segments: pharmaceuticals and biomedicals. For
financial information about industry segments, see Note 12 of Notes to
Consolidated Financial Statements.
FOREIGN OPERATIONS
The Company operates in the United States, Yugoslavia, Mexico, Western
Europe, Canada and Asia Pacific. For financial information about domestic and
foreign operations and export sales, see Note 12 of Notes to Consolidated
Financial Statements.
Foreign operations are subject to certain risks, including price and
exchange controls, limitations on foreign participation in local enterprises,
possible nationalization or expropriation, potential default on the payment of
government obligations with attendant impact on private enterprise, political
instability, health-care regulation and other restrictive governmental actions.
Changes in the relative value of currencies take place from time to time and in
the past have affected ICN's results of operations and financial condition.
The future effects of these fluctuations on the operations of ICN and its
subsidiaries are not predictable. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation--Foreign Currency Translation."
SPI has a 75% interest in ICN Galenika, a Yugoslav joint venture. A
substantial majority of ICN Galenika's business is conducted in the Federal
Republic of Yugoslavia (Serbia and Montenegro). The current political and
economic circumstances in Yugoslavia create certain risks particular to that
country. Yugoslavia has been operating under sanctions imposed by the United
Nations since May 1992, which have severely limited the ability to import raw
materials for manufacturing and have prohibited all exports. In addition,
certain risks such as hyperinflation, currency devaluations, wage and price
controls, potential government action and a rapidly deteriorating economy could
have a material effect on the Company's results of operations.
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INVESTMENT ACCOUNTED FOR USING THE EQUITY METHOD OF ACCOUNTING:
SPI
SPI manufactures, distributes and sells over 1,000 pharmaceutical and
nutritional products, primarily in the United States, Yugoslavia, Mexico,
Western Europe and Canada through independent sales representatives and its own
marketing and sales staff. Major product lines as described below include
anti-infectives (including antibiotics), medicated nutritionals and vitamins,
anticholinesterases and dermatologicals. SPI was organized by ICN in November
1981. Effective January 1983, the Company transferred to SPI, in exchange for
all the outstanding shares of common stock of SPI, all the outstanding shares
of the Company's wholly-owned Canadian and Mexican subsidiaries and certain
assets net of certain liabilities of the Company's operating division in
Covina, California. ICN currently owns 39% of SPI.
PRODUCTS
Anti-Infectives
General. SPI currently sells approximately 65 anti-infective pharmaceutical
products primarily in North America, Latin America, Western Europe and Eastern
Europe. Anti-infective products are used primarily for the therapy of, or
prophylaxis against, infections resulting from viruses, bacteria and parasites.
SPI manufactures most of these products, and contracts with third parties for
the manufacture of the remainder. Anti-infectives constituted 31%, 37% and 36%
of SPI's consolidated net sales for the years ended December 31, 1993, 1992,
and 1991, respectively. The more important anti-infective products and their
major market territories are as follows:
Virazole(R) USA, Canada and Europe
Virazid(R) (Virazole(R)) Mexico and Spain
Anapenil(R) Mexico
Dicorvin(R) Spain
Yectamicina(R) Mexico
Hidro(R) Mexico
Alfacet Yugoslavia
Pentrexyl Yugoslavia
Palitrex Yugoslavia
Jugocillin Yugoslavia
Virazole(R). Virazole(R) is currently approved for sale in various
pharmaceutical formulations in over 40 countries for the treatment of several
different human viral diseases. In North America, Virazole(R) has been
approved for hospital use in aerosolized form to treat infants and young
children who have severe lower respiratory infections caused by RSV.
Substantially similar approvals for Virazole(R) treatment of RSV have been
granted by governmental authorities in 22 other countries. The Virazole(R)
trademark is used in North America and certain European countries. The product
is sold in Latin America as Vilona(R) and Virazid,(R) where it has been
commercially available for over 14 years, and is approved for the treatment of
hepatitis, herpes infections, influenza, and exhanthemous viral diseases such
as measles and chicken pox, as well as RSV. In June 1990, Virazole(R) was
approved in the Republic of Ireland for the management of the early stages of
human immunodeficiency virus ("HIV") infection and in November 1991, the
Hungarian government also approved Virazole(R) for early management of the
disease in HIV positive patients.
The commercial sale of VirazoleR for other indications and presentations
will require regulatory authorization in the United States and other countries.
There can be no assurance that authorization of the commercial sale of
VirazoleR for any other indication or presentation will be obtained in the
United States or any other country, or that, if such authorization is secured,
the drug will be commercially successful.
Virazole(R), Vilona(R) and Virazid(R) collectively constituted 7%, 6%,
and 16% of SPI's consolidated net sales for the years ended December 31, 1993,
1992, and 1991, respectively.
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Other Anti-Infectives. Alfacet and Palitrex are cephalosporons
manufactured by SPI under license from Eli Lilly while Pentrexl (ampicillin) is
licensed from Bristol-Myers Squibb. Anapenil, Trimexazol, Hidro, Rofat, and
Yectamicina(R) are standard antibiotics while Dicorvin is a new macrolide
antibiotic.
Medicated Nutritionals and Vitamins
SPI manufactures, subcontracts, and markets approximately 870 nutritional
and vitamin products, in North America, Latin America, Western Europe and
Eastern Europe. In Mexico, SPI manufactures and markets injectable and oral
multi-vitamins and supplements under the Bedoyecta-Tri(R), Dextrevit(R),
M.V.I.(R), and Vi-Syneral(R) trade names. In Yugoslavia, Galenika manufactures
and markets Oligovit(R), Beviplex, Bedoxin, and Chymoral 100 Forte. In the
United States, SPI markets nutritional and vitamin products under the
RichLife(R), Plus(R), Nutri-dyn(R) and Dartell(R) trade names.
Medicated nutritionals and vitamins constituted 9%, 8%, and 10% of SPI's
consolidated net sales for the years ended December 31, 1993, 1992, and 1991,
respectively.
Anticholinesterases
SPI markets three anticholinesterase product lines under the trade names
Mestinon(R), Prostigmin(R) and Tensilon(R), in North America. These products
are used in treating myasthenia gravis, a disease characterized by muscle
weakness and atrophy, and in reversing the effects of certain muscle relaxants.
These products, for which SPI received a distribution sublicense from ICN in
1988, are manufactured by Hoffmann-LaRoche, Inc. Mestinon(R), Prostigmin(R),
and Tensilon(R) collectively constituted 3%, 2%, and 3% of SPI's consolidated
net sales for the years ended December 31, 1993, 1992, and 1991, respectively.
Dermatologicals
SPI currently manufactures and markets approximately 75 dermatological
products, primarily in North America and Eastern Europe. SPI's dermatological
line, marketed under the ICN label, consists primarily of products used for the
treatment of psoriasis and bleaching agents indicated for the treatment of
hyperpigmented skin. These products include Oxsoralen-ultra(R), Solaquin(R),
Trisoralen(R) and Eldoquin(R). A related product introduced in fiscal 1988,
8-MOP(R), is indicated for the treatment of cutaneous T-cell lymphoma, a form of
skin cancer. Multi-tar(R) is a family of medicated shampoo products.
Duonalc(R) is a dermatological solution for the prevention of acne.
Dermatological products constituted 7%, 7%, and 6% of SPI's consolidated net
sales for the years ended December 31, 1993, 1992, and 1991, respectively.
Vision Care Products
SPI manufactures and markets the Unicare(R) line of contact lens and lens
care products primarily in Latin America and Western Europe. Vision care
products constituted 2%, 2%, and 2% of SPI's consolidated net sales for the
years ended December 31, 1993, 1992, and 1991, respectively.
Other Products
SPI also manufactures and markets approximately 200 other pharmaceutical
products, including cardiovascular agents, antirheumatics, insulins, analgesics
and psychotropics in Eastern Europe, lithium-based products for the treatment
of manic depressive syndromes, anti-ulcer medicines, products for hormonal
supplementation and various generic pharmaceuticals and surgical products.
These products collectively constituted 48%, 44%, and 29% of SPI's consolidated
net sales for the years ended December 31, 1993, 1992, and 1991, respectively.
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MARKETING AND CUSTOMERS
SPI has a marketing and sales staff of approximately 1,320 persons,
including sales representatives in North America, Latin America, Western Europe
and Eastern Europe, who call on physicians, pharmacists, distributors and other
health-care professionals. As part of its marketing program, SPI does direct
mailings, advertises in trade and medical periodicals, exhibits products at
medical conventions, sponsors medical education symposiums and sells through
distributors in countries where it does not have its own marketing staff.
In the United States, SPI sells its pharmaceutical products through
approximately 400 drug wholesalers who, in turn, distribute them to drug stores
and hospitals. SPI's nutritional product line is sold directly and through
distributors to various retail outlets and to certain health-care
professionals.
In Mexico, SPI serves an estimated 18,000 pharmacies through a network of
105 distributors. It also sells directly to approximately 870 pharmacists and
160 hospitals in Mexico.
In Western Europe, SPI markets vision care products in the Netherlands
through hospitals and pharmacies and to retail customers through optical shops.
SPI's Spanish subsidiary sells pharmaceuticals and blood fractionation products
via its own sales force to approximately 530 hospitals and retail outlets,
5,000 pharmacies and 200 wholesalers.
In Canada, SPI sells VirazoleR for RSV to approximately 1,300 hospitals
directly and through wholesalers. The other pharmaceutical products are sold
to approximately 5,000 drug stores and are distributed through multiple
wholesalers.
SPI's newest subsidiary, Galenika, is Yugoslavia's largest pharmaceutical
manufacturer with an estimated 43% share of the total pharmaceutical market in
that country. Galenika sells a broad range of approximately 250 human drugs
and approximately 200 veterinary, dental and other over the counter products.
Galenika sells products through approximately 30 wholesalers, 6 representative
offices and 85 sales representatives countrywide. Prior to the imposition of
sanctions in May 1992, over 10% of the total production was exported, mainly to
Russia and other Eastern European countries, as well as to many countries in
Africa, the Middle East and the Far East. (See Note 18 of Notes to
Consolidated Financial Statements.)
CONSOLIDATED SUBSIDIARIES:
VIRATEK
Viratek is principally engaged in the development of therapeutic
pharmaceutical compounds derived from nucleic acids, including the broad
spectrum antiviral agent ribavirin that is marketed in the United States,
Canada and most of Europe under the trade name VirazoleR. Viratek was formed
in August 1980 for the purpose of continuing the Company's research and
development efforts on such compounds. In November 1980, the Company
transferred to Viratek all its rights to the compounds developed at a former
division of the Company, including the broad spectrum antiviral agent
ribavirin. Management believes that ribavirin is the most developed and
promising of the many chemical compounds owned by Viratek. See "Ribavirin" and
"SPI" for additional information concerning ribavirin.
Viratek will incur expenses over the next several years for clinical
trials in pursuit of FDA authorization of the commercial sale of ribavirin for
various indications or presentations, in addition to treatment in aerosolized
form of RSV in infants, as well as for foreign government authorizations. To
fund these expenditures, Viratek may use cash flow from operations, if
available, and may seek to raise additional capital through financing,
licensing, joint venture or other arrangements. In February and March 1993,
Viratek successfully completed a public offering in which it sold units
consisting of one share of Common Stock and one warrant to purchase one share
of Common Stock. 1,375,000 units plus the overallotment of 206,250 units were
sold for net proceeds of approximately
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$10,265,000. In August 1993, 1,366,642 warrants were exercised resulting in
net proceeds to Viratek of $13,472,000. The above transactions along with the
sale of ICN owned Viratek shares, reduced ICN's ownership percentage to 63% at
December 31, 1993. See Note 3 of Notes to Consolidated Financial Statements.
The only product marketed by Viratek was ribavirin. Prior to 1991,
Viratek sold ribavirin to SPI, who marketed it to third parties under various
licensing and supply agreements with Viratek. During 1991, Viratek transferred
its remaining ribavirin inventory to SPI for its net book value of $2,943,000.
Since 1991, SPI has procured its ribavirin inventories from other
manufacturers. Effective December 1, 1990, SPI and Viratek entered into a new
royalty agreement. Under this agreement, SPI acts as Viratek's exclusive
distributor of ribavirin and pays Viratek a royalty of 20 % on sales worldwide.
SPI intends to pursue its marketing efforts in most countries through existing
or future license or distribution arrangements which would minimize SPI's
investment in these countries and would generally provide for the sale of
ribavirin in bulk or finished form to the licensees or distributors for resale
in the specified country.
Beginning in fiscal 1990, management made the decision to substantially
reduce the research and development activities to support the goal of a
reduction in the number of research projects and a concentration on compounds
and indications showing the most promise for commercial development, such as
ribavirin and certain anticancer and immune stimulator agents. This decision
was due in part to a reduction in the amount of funds available for research
and development. In conjunction with this decision, it was determined that the
Company's only operating function would be to receive royalties on worldwide
sales of ribavirin. Accordingly, the Company significantly reduced the number
of its employees and the level of management involvement. In 1992, Viratek
made a decision to increase research and development activities which included
developing pharmaceutical products derived from nucleic acids and the
development of in vitro commercial diagnostics products. Currently the Company
is focusing on clinical testing of VirazoleR in the treatment of hepatitis C
and initiating research to develop new biomedical and diagnostic products.
During 1990 and 1991, two phase II studies were being performed by the
Karolinska Institute and the National Institutes of Health ("NIH") regarding
the efficacy of ribavirin in the treatment of chronic hepatitis C. Once the
results from the studies were completed, indicating positive results, the
Company made the decision to move forward with phase III studies. In addition,
the amount of funds available for research and development activities had
increased and the Company made the decision to increase these activities. This
includes a new research program focused on the detection and measurement of a
group of human peptide hormones or regulators and in vitro commercial
diagnostics.
During 1993, Viratek substantially completed clinical testing of
Virazole for the treatment of chronic hepatitis C and started up a new
discovery program using gene specific technology to target diseases such as
cancer, chronic viral infections and psoriasis.
BIOMEDICALS
Biomedicals develops, manufactures and sells research chemical products,
cell biology products, biomedical instrumentation, diagnostic reagents and
radiation monitoring services. Major product lines of the research chemical
products group include biochemicals, radiochemicals and cell biology products
and chromatography materials. Major product lines of the biomedical
instrumentation group include microplate instrumentation, environmental
technology products and precision liquid delivery instrumentation. The
diagnostic reagents group provides diagnostic reagents and instrumentation,
including enzyme and radio- immunoassay kits and immunoassay systems.
Biomedicals also purchases research chemicals from other manufacturers, in
bulk, for repackaging and distributes biomedical instrumentation manufactured
by others. Biomedicals' principal customers are life science researchers,
including those engaged in molecular biology, genetic engineering and other
areas of biotechnology, biochemical research laboratories and clinical
laboratories. These customers are located in the United States, Canada,
Mexico, South America, Eastern and Western Europe, Australia and Japan.
Biomedicals' products are sold through
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Company-produced catalogs, direct mail advertising, a direct sales force and
selected independent distributors and agents.
Biomedicals was incorporated in September 1983 as a Delaware corporation
by ICN and has since operated as an ICN subsidiary. Effective January 1, 1984,
ICN transferred to Biomedicals, in exchange for all of the then outstanding
shares of common stock of Biomedicals, certain assets and liabilities
comprising the Life Sciences Group of ICN. Some of the operations of that
group had been conducted by ICN since ICN's inception in 1960. Since 1984,
several businesses and product lines have been acquired by ICN on behalf of
Biomedicals and subsequently transferred to Biomedicals.
PRODUCTS
Research Chemical Products Group
Biomedical's research products group markets more than 55,000 chemical,
radiochemical, biochemical and immunochemical compounds. These compounds
result from chemical synthesis, biochemical (enzymatic) synthesis, and/or are
isolated from natural sources such as micro-organisms, plant, and animal
tissues. In addition, the biomedical group offers laboratory plastic ware,
medias for cell culture, and materials for chromatography.
Biochemicals. Biochemicals are chemicals that occur in or result from
any life process. The major biochemicals in the research laboratory market
include proteins, peptides, amino acids, carbohydrates, enzymes, nucleic acids
and their derivatives. Biomedicals repackages and sells, primarily through
catalog, spot mailings and telephone solicitation, approximately 35,000
chemical items (including rare and fine chemicals) to customers in
approximately 1,500 laboratories worldwide who are largely engaged in organic,
inorganic and biochemical experimentation and synthesis. Major products
include ammonium sulfate, cesium chloride, guanidine hydrochloride, L-glutamine
and ultra-pure tris.
In recent years, there has been an increasing demand for ultra-pure
biochemicals, particularly for use in molecular biology and medically-oriented
research work. Biomedicals has since further expanded its ultra-pure line
through the addition of modifying and restriction enzymes, reagents for gel
electrophoresis and other chemicals used in various phases of genetic
engineering. This includes materials used in recombinant technology such as
growth factors, restriction endonucleases (enzymes which "cut" DNA material at
a specific point) and polynucleotide "linkers" which are used to rejoin divided
segments of DNA molecules.
Under the K&K Laboratories trade name, Biomedicals offers 23,000 rare and
fine chemicals consisting principally of organic chemicals, inorganic
chemicals, organometallics, rare earth metals and specialty intermediates.
These products are used in the chemical, pharmaceutical, aerospace, electronic
and educational fields.
Radiochemicals. Radiochemicals are produced through the combination of
radioactive raw materials with non-radioactive chemical intermediates, the
resulting products, referred to as "labeled" or "tagged," possess one or more
radioactive atoms. These isotopes are used by researchers in conjunction with
sophisticated measuring instruments to follow or trace the chemical through a
biochemical system. Such work helps to determine the mechanisms by which
molecules are transformed within living systems, furthering knowledge of
genetics, biological and physiological disorders, including hormonal
deficiencies, physical abnormalities and a range of organ and endocrinological
disorders.
Using a variety of multi-step chemical and biochemical procedures,
Biomedicals produces in excess of 800 different "radio active" or "labeled"
compounds. The Irvine, California facility uses phosphorus-32, Sulfur-35,
Tritium, and Carbon-14 to produce organic molecules for use in a large number
of biomedical research applications.
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Biomedicals produces and supplies reactor-produced radionuclides but does not,
at this time, refine such products for human use radiopharmaceuticals.
Cell Biology Products Group
Biomedicals sells a wide range of components for the culturing of cells
in an artificial environment under specially controlled conditions. Prior to
the sale of the Scottish manufacturing facility in April 1993, Biomedicals
manufactured most cell biology products in-house. Biomedicals now procures
these products at a lower cost from third party suppliers. Cell culture has
become an increasingly important technique for the study of cell behavior, the
study of viruses and viral infections, the development and production of
vaccines and the testing of new drugs, chemicals, food and toxic substances.
Biomedicals is a supplier of materials for cell culture and offers a
comprehensive range of media, growth factors and sera, as well as a variety of
disposable plastic labware and ancillary equipment. Biomedicals chemically
defined growth media, which nourish living cells, are used by customers in
maintaining or growing cells in the laboratory. Biomedicals also markets
processed animal sera (used to enrich media) and uses both raw and processed
sera to formulate other products. The availability and costs of raw animal
sera may vary and is largely beyond Biomedicals control.
Other cell biology products include the Titertek-PlusTM family of
pipettes and disposable plastic labware.
Chromatography Products. Chromatography products include chemicals known
as adsorbents as well as other consumable products, such as nylon membranes,
which are used for chromatography, (a scientific method employing sophisticated
instrumentation to separate chemical solutions in order to analyze their
components). Biomedicals distributes adsorbent products worldwide which are
produced for it in Germany.
Biomedical Instrumentation Group
Biomedicals biomedical instrumentation group markets microplate
instruments, a wide range of precision liquid delivery systems, and gamma
counters.
Microplate Instrumentation. These products are laboratory instruments
serving the needs of all applications utilizing the microtitration plate
(microplate) format. Microplates are 96-well trays, about the size of a
postcard, that offer a convenient, economical space-saving alternative to test
tubes and have become the vessel of choice for biomedical tests. The
preeminent microplate application is immunoassays used in diagnostics, public
health screening, quality control and research. Biomedicals' TitertekTM
product lines offer instruments that address all steps in using microplates
including dispensing samples and reagents, reagent displacement (known as
microplate "washing"), and measurement calorimetric, fluorescent and
luminescent test results. The products range from hand operated pipettes to
integrated analytical systems.
Precision Liquid Delivery Systems. Biomedicals' instrument manufacturing
facility in Huntsville, Alabama, produces high precision liquid delivery
systems starting with general purpose bench-top stations and extending to
customized automated systems incorporating process control, test measurement
and data reduction. The liquid delivery products are all complimentary to, and
compatible with, the microplate instruments, (both those manufactured in
Huntsville and own-label products obtained from third- parties), and this
integration of the product lines enhances Biomedicals' ability to offer users a
flexible system approach to meeting their evolving laboratory equipment needs.
Gamma Counters. The Huntsville facility also produces gamma counters
(instruments that quantify the amount of radioactive "labels" incorporated into
a sample) used in diagnostics and research. Biomedicals offers a choice of
automatic sample-feed and manually loaded batch processing machines, all with a
common data analysis and reduction software package.
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All instrumentation sold by Biomedicals is supported by field and factory
service capability. Service contracts are actively sold to the large customer
base of long-term users of Biomedicals' instruments.
Diagnostic Reagents Group
Biomedicals provides diagnostic reagents and instrumentation to
hospitals, clinics and biomedical research laboratories. Immunoassay is a
diagnostic technique used to determine the quantity of biological substances
present in very low concentrations in body fluids. In the United States alone,
more than 5,000 laboratories use the technique in routine clinical diagnostic
applications. Biomedicals manufactures both Enzyme-Immunoassay and
Radio-Immunoassay kits at its Costa Mesa, California facility and markets these
kits under the IMMUCHEM product line. In 1993, Biomedicals developed a line of
non-isotopic enzyme-immunoassay used for screening newborns for inherited
genetic diseases ("Neonatal line"). Biomedicals' strategy is to develop a
complete line of reagents to address its strength in the endocrinology and
newborn screening product segments. Biomedicals has developed instruments
which allow their assays to be automated for moderate to high volume
applications in which ease of use and labor productivity are competitive
advantages. Biomedicals will continue to add more internally developed
products to its Neonatal line in 1994 including a new fully-automated analyzer.
Radiation Monitoring Services Group
Biomedicals provides an analytical monitoring service to determine
personal occupational exposure to ionizing radiation.
Since 1973, ICN has provided dosimetry services to dentists,
veterinarians, chiropractors, podiatrists, hospitals, universities,
governmental institutions, and power plants. ICN's services include both film
and Thermo Luminescent ("TL") badges in several configurations to accommodate a
broad scope of users. This service includes the manufacture of badges,
distribution to and from clients, analysis of badges and a radiation report
indicating the exposure.
Marketing and Customers
Biomedicals marketing operations are headquartered at the corporate
offices in Costa Mesa, California. Sales and marketing methods vary according
to product group and include direct sales through a field sales force, catalog
sales, direct mail campaigns and independent agents/distributors. Biomedicals
has a field sales and marketing organization of 141 persons in the United
States and Canada, 73 in Europe, 9 in Australia and 6 in Japan.
Biomedicals customer group for research products is principally composed
of biomedical research institutions, such as universities, the National
Institutes of Health, pharmaceutical companies, and, to a lesser extent,
hospitals. Customers for diagnostic reagents and instruments are generally
clinics, medical offices and hospitals. Customers for Biomedicals' other
biomedical instruments include both biomedical research institutions and
clinics, medical offices and hospitals. Biomedicals is not materially
dependent upon any one customer or a small group of customers and does not
believe the loss of any one customer would have a material adverse effect on
Biomedicals. However, since a large portion of medical research in both the
United States and other countries is funded by governmental agencies,
Biomedicals results of operations could be adversely affected by cancellation
or curtailment of governmental expenditures for medical research.
ICN currently owns approximately 69% of Biomedicals outstanding common
stock as of March 17, 1994.
COMPETITION
Both segments of the Company operate within highly competitive
industries. The competitive position of the Company's products is
significantly affected by their acceptance among physicians and scientists and
by the development of new products by competitors. A number of companies, both
in the United States and abroad, are
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actively engaged in marketing similar products and developing new products
similar to those currently under development or proposed for future development
by the Company. Most of these companies have substantially greater capital
resources, marketing capabilities and larger research and development staffs
and facilities than those of the Company. The pharmaceutical industry is
characterized by extensive and on-going research efforts. Others may succeed
in developing products superior to those presently marketed or proposed for
development by the Company. Progress by other researchers in areas similar to
those being explored by the Company may result in further competitive
challenges.
BACKLOG
The Company does not consider backlog to be a material factor in its
pharmaceuticals segment because, as is customary in the industry, its products
are sold on an "open order" basis. Backlog is not a significant factor for the
biomedicals segment as most orders received are filled and shipped promptly
after receipt. No single customer accounted for more than 10% of the Company's
consolidated net sales during the year ended December 31, 1993.
RAW MATERIALS
In general, raw materials used by the Company in the manufacture of its
products are obtainable from multiple sources in the quantities desired.
However, the availability and costs of raw animal sera for distribution and for
manufacturing certain of Biomedicals cell biology products may vary from time
to time and is largely beyond Biomedicals' control. Additionally in the last
decade, the number of reactor sites producing radioactive raw materials has
diminished.
During 1992, The United Nations Security Council and the United States
adopted a resolution that imposed economic sanctions on the Federal Republic of
Yugoslavia (Serbia and Montenegro). The sanctions specify that specific
authorization in the form of a license must be granted on a transaction by
transaction basis from the country of origin and the United Nations before the
shipment of raw materials and finished goods can be made into Yugoslavia.
Currently, few licenses have been granted for the import of raw materials. It
is the policy of the United Nations Sanctions Committee to grant licenses for
finished goods, but only for raw materials in exceptional cases. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations".
LICENSES PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS
The Company owns a number of domestic and foreign patents now in force,
some of which pertain to products currently being marketed by both the
pharmaceuticals and biomedicals segments. The Company may be materially
dependent on the protection afforded by their respective patents. No assurance
can be given as to the breadth or degree of protection which these patents will
afford the Company.
In addition, the Company has filed applications for United States and
foreign patents based on inventions resulting from the development of its
technology. The Company expects to be issued patents in the future, although
there can be no assurance as to the breadth or the degree of protection which
these patents, if issued, will afford it. In addition to the Company,
universities and other public and private concerns have filed patent
applications and may be issued patents on inventions (or otherwise possess
proprietary rights to technology) useful to the Company. The extent to which
the Company may be required to license such patents or other proprietary
rights, and the cost and availability of such licenses, are presently unknown.
In addition, the Company intends to rely to an extent on unpatented proprietary
know-how. However, there can be no assurance that others will not
independently develop such know-how or otherwise obtain access to the Company's
know-how.
SPI has acquired from Viratek the rights to market Virazole(R) in Mexico,
Canada, the United States and in other countries for all uses. The technology
related to these uses of Virazole(R) is broadly covered by a United States
patent expiring in 1999. Licensed technology from Viratek relating to
Virazole(R) is also covered by United
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States patents expiring between 1994 and 1999 and Canadian patents expiring
between 1994 and 2006. The Company may be materially dependent on the
protection afforded by Viratek's patents relating to VirazoleR, and no
assurance can be given as to the breadth or degree of protection which these
patents will afford Viratek.
GOVERNMENT REGULATION
Prior to marketing or manufacturing new products for use by humans, the
Company must obtain United States Food and Drug Administration ("FDA") approval
in the United States and approval from comparable agencies in other countries.
Obtaining FDA approval for new products and manufacturing processes can take a
number of years and involve the expenditure of substantial resources. The
Company must satisfy numerous requirements, including preliminary testing
programs on animals and subsequent clinical testing programs on humans, to
establish product safety and efficacy. No assurance can be given that
authorization of the commercial sale by the Company or its affiliates of any
new drugs or compounds for any application will be secured in the United States
or any other country, or that, if such authorization is secured, those drugs or
compounds will be commercially successful. The FDA and other regulatory
agencies in other countries also periodically inspect manufacturing facilities.
The Company is subject to licensing and other regulatory control by the
FDA, other federal and state agencies and comparable foreign governmental
agencies. In addition, Biomedicals is subject to the regulatory control of the
Nuclear Regulatory Commission.
Provisions enacted or adopted by United States federal, state and local
agencies regulating the discharge of waste into the environment do not
currently have a material effect upon the Company's capital expenditures,
earnings or competitive position.
The Company has not experienced any material effect on the capital
expenditures, earnings or competitive position of the Company as a result of
compliance with any federal, state or local provisions regarding the protection
of the environment.
EMPLOYEES
The Company currently employs approximately 5,969 persons, which includes
5,420 SPI employees, 4,500 of whom are covered by collective bargaining
agreements. The Company has not experienced any significant work stoppage,
slowdown or other serious labor problems which have materially impeded its
business operations. The Company's management considers its relations with its
employees to be satisfactory.
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ITEM 2. PROPERTIES
The following are the principal facilities of the Company, its
subsidiaries and SPI:
APPROXIMATE
FLOOR SPACE LEASED/
LOCATION PRINCIPAL OPERATION SQ. FT. OWNED
-------- ------------------- -----------
Corporate:
Costa Mesa, California Offices and laboratory 164,000 Owned
Pharmaceuticals Group (SPI):
Covina, California Offices and warehouse 185,000 Owned
Bryan, Ohio Warehouse and manufacturing
(FDA approved) 37,000 Owned
The Hague, Netherlands Offices and warehouse 25,000 Owned
Barcelona, Spain Offices and manufacturing 100,000 Owned
Mexico City, Mexico Offices and manufacturing 144,000 Owned
Mexico City, Mexico Offices and manufacturing 146,000 Owned
Brookville, Mississippi Manufacturing (currently idle) 4,000 Owned
Belgrade, Yugoslavia Offices and manufacturing 781,000 Owned
Montreal, Canada Offices and manufacturing 97,000 Owned
Biomedicals Group:
Eschwege, Germany Offices and manufacturing 21,000 Owned
Irvine, California Offices and manufacturing 27,000 Leased
High Wycombe, England Sales Office 12,000 Leased
Opera, Italy Sales and Distribution Center 10,000 Owned
Huntsville, Alabama Offices and manufacturing 60,000 Owned
Aurora, Ohio Sales and Distribution Center 68,000 Leased
Bonn, Germany Sales and Distribution Center 25,500 Leased
Mississauga, Canada Sales and Distribution Center 18,500 Leased
Thame, England Sales and Distribution Center 5,800 Leased
Sydney, Australia Sales and Distribution Center 17,000 Leased
Brussels, Belgium Sales and Distribution Center 5,900 Leased
Tokyo, Japan Sales and Distribution Center 1,000 Leased
Paris, France Sales Office 900 Leased
The Company's leased facilities are leased for various terms ranging from
one to twenty-two years. The Company does not anticipate any difficulty in
renewing such leases on expiration, or leasing substitute facilities at
reasonable terms. ICN also subleases office and manufacturing space in Costa
Mesa, California, to Viratek, SPI and Biomedicals. The High Wycombe facility
is currently vacant and available for sublease (See Note 16 of Notes to
Consolidated Financial Statements).
The Company currently has facilities in Portland, Oregon and Dublin,
Virginia which are held for sale and are recorded at the lower of cost or net
realizable value in the accompanying financial statements.
During the fourth quarter of 1993, the Company moved its Italian
operation from Cassina de Pecchi, a leased facility, back to Opera, an owned
facility. The Opera facility was classified as an asset held for sale for the
year ended December 31, 1992 and has been reclassified to Property, Plant and
Equipment in December 1993.
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In the opinion of the Company's management, all facilities occupied by
the Company are considered adequate for present and expected requirements, and
the equipment in use is considered to be in good condition and suitable for the
operations involved.
ITEM 3. LEGAL PROCEEDINGS
Litigation
The Company is a defendant in certain consolidated class actions
pending in the United States District Court for the Southern District of New
York entitled In re Paine Webber Securities Litigation (Case No. 86 Civ. 6776
(VLB); In re ICN/Viratek Securities Litigation (Case No. 87 Civ. 4296 (VLB)).
The plaintiffs represent alleged classes of persons who purchased ICN, Viratek
or SPI common stock during the period January 7, 1986 to and including April
15, 1987. In their memorandum of law, dated February 4, 1994, the ICN
Defendants argue that class certification may only be granted for purchasers of
ICN common stock for the period August 12, 1986 through February 20, 1987 and
for purchasers of Viratek common stock for the period December 9, 1986 through
February 20, 1987. The ICN Defendants assert that no class should be certified
for purchasers of the common stock of SPI for any period. The plaintiffs
allege that during such period the defendants made, or aided and abetted other
defendants in making, misrepresentations of material fact and omitted to state
material facts concerning the business, financial condition and future
prospects of ICN, Viratek and SPI in certain public announcements, Paine
Webber, Inc. research reports and filings with the Commission. The alleged
misstatements and omissions primarily concern developments regarding VirazoleR,
including the efficacy and safety of the drug and the market for the drug. The
plaintiffs allege that such misrepresentations and omissions violate Section
10(b) of the Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and
constitute common law fraud and misrepresentation. The plaintiffs seek an
unspecified amount of monetary damages, together with interest thereon, and
their costs and expenses incurred in the action, including reasonable
attorneys' and experts' fees. The ICN defendants moved to dismiss the
consolidated complaint in March 1988, for failure to state a claim upon which
relief may be granted and for failure to plead the allegations of fraud and
misrepresentation with sufficient particularity. On September 18, 1992, the
Court denied the ICN defendants' motion to dismiss and for summary judgment.
The ICN defendants filed their answer on February 17, 1993. On October 20,
1993, plaintiffs informed the Court that they had reached an agreement to
settle with co-defendant Paine Webber, Inc. and that they would submit a
proposed settlement stipulation to the Court. Expert discovery, which
commenced in September 1993, is expected to conclude by the end of April 1994.
Plaintiffs' damages expert, utilizing assumptions and methodologies that the
ICN Defendants' damages experts find to be inappropriate under the
circumstances, has testified that, assuming that classes were certified for
purchasers of ICN, Viratek and SPI common stock for the entire class periods
alleged by plaintiffs, January 7, 1986 through April 15, 1987, and further
assuming that all of the plaintiffs' allegations were proven, potential damages
against ICN, Viratek and SPI would, in the aggregate, amount to $315,000,000.
The ICN Defendants' four damages' experts have testified that damages are zero.
Management believes, having extensively reviewed the issues in the above
referenced matters, that there are strong defenses and that the Company intends
to defend the litigation vigorously. While the ultimate outcome of these
lawsuits cannot be predicted with certainty, and an unfavorable outcome could
have an adverse effect on the Company, at this time management does not expect
that these matters will have a material adverse effect on the financial
position, result of operations or liquidity of the Company. The attorney's
fees and other costs of the litigation are allocated equally between ICN and
Viratek.
In August 1992, an action was filed in United States District Court for
the Southern District of New York, entitled Rossi v. ICN Pharmaceuticals, Inc.
(Case No. 92 Cir. 4819 (CL6)). The plaintiffs, citing theories of product
liability, negligence and strict liability in tort, allege that birth defects
in an infant were caused by the mother's exposure to ribavirin during
pregnancy. The plaintiff's counsel agreed to place the case on the courts
"suspense calendar" pending completion of ICN's investigation of the underlying
facts. Based on such investigation,
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the case was dismissed with prejudice pursuant to stipulation by the parties
in December 1993. Per the License Agreement, SPI has indemnified Viratek and
ICN for lawsuits involving the use of VirazoleR.
On September 27, 1993, ICN and Biomedicals filed a complaint in the
California State Superior Court for Orange County, California, against GRC
International Inc., alleging fraud, negligent misrepresentation in the sale of
securities in California and violations of state and federal securities laws.
The precise amount of damages is unknown at this time. The lawsuit arises out
of the acquisition of all of the issued and outstanding shares of Flow
Laboratories, Inc. ("Flow") and Flow Laboratories B.V. by Biomedicals in
November 1989 from GRC International Inc., (formerly known as Flow General
Inc.). Defendant GRC's motion to compel arbitration was granted as to the
Biomedicals claims. The action is stayed until April 7, 1994, as to ICN's
causes of action.
On April 5, 1993, ICN and Viratek filed suit against Rafi Khan ("Khan")
in the United States District Court for the Southern District of New York. The
complaint alleges, inter alia, that Khan violated numerous provisions of the
securities laws and breached his fiduciary duty to ICN and Viratek by
attempting to effectuate a change in control of ICN while acting as an agent
and fiduciary of ICN and Viratek. As relief, ICN and Viratek, among other
things, sought an injunction enjoining Khan from effectuating a change in
control of ICN and compensatory and punitive damages in the amount of
$25,000,000.
Khan filed a counterclaim on April 12, 1993, naming the then ICN
directors and ICN, as a nominal defendant sued only in a derivative capacity.
The counterclaim contains causes of action for slander, interference with
economic relations, and a shareholders' derivative action for breach of
fiduciary duties. Khan seeks compensatory damages for interest in an
unspecified amount, and exemplary damages of $29,000,000.
On May 13, 1993, following a four-day preliminary injunction hearing, the
Court granted ICN and Viratek's motion for a preliminary injunction enjoining
"Khan, directly or indirectly, or anyone acting on his behalf or with him, from
seeking to effect a changeover of [ICN], by consent[, proxy solicitation,] or
otherwise," and also ordered that "future [SEC] filings should be cleared with
the plaintiff and with the Court before they are issued. . . ."
On May 20, 1993, Khan moved in the United States Court of Appeals for the
Second Circuit for a stay pending appeal. That motion was denied on the
conditions that, pending decision on appeal, "[the ICN Companies] do not take
any steps other than in the normal course of business" and "that the
shareholders meeting shall be deferred." On August 24, 1993, the Appellate
Court issued its opinion in which it (i) upheld all findings of fact made by
the District Court, (ii) vacated the injunction to the extent it provided for a
permanent bar against Khan that prohibited him from effecting a change in
control of ICN and required Khan to pre-clear his SEC filings with ICN, and
(iii) upheld those partions of the injunction which prevented Khan from going
forward with his attempt to effect a change in control of ICN unless and until
he filed a 13(d) statement disclosing the existence of a group and filed
corrective proxy materials.
On September 29, 1993, ICN filed an amended complaint against Khan
alleging, among other things, that Khan had violated the Racketeer Influenced
and Corrupt Organization Act ("RICO") and the securities laws of the United
States.
On November 26, 1993, following the conclusion of the hearing and oral
argument by counsel for the parties, the District Court granted the ICN
Companies' fourth application for a preliminary injunction.
The District Court denied Khan's request for a stay of the decision
pending appeal to the Second Circuit but stayed the decision pending issuance
of a written order.
On December 10, 1993, the District Court issued a preliminary injunction
(the "Second Preliminary Injunction") prohibiting Khan from proceeding with his
efforts to replace the Board of Directors of the Company by solicitation of
proxies or consents or by any other means until such time as Khan filed
revised soliciting materials disclosing the District Court findings that
(a) Khan's testimony before the District was "untruthful" and "incredible";
(b) Khan was involved and participated in a scheme to obtain British Gas shares
in a manner not permitted by British law; (c) Khan knew he was a subject of the
criminal investigation by British law enforcement authorities at the time the
criminal investigation began in 1986 or 1987 and has known it throughout his
involvement with the Company and his attempts to take it over; (d) Khan
participated in the illegal conduct that gave rise to the criminal
investigation by British law enforcement authorities; (e) Khan was and is a
subject of a criminal investigation by British law enforcement authorities;
(f) the British law enforcement authorities obtained and executed a search
warrant on or about February 1987 for the search of a house in which Khan had
an ownership interest in London, England; and (g) the District Court has made a
reference to the United States Attorney's Office for the Southern district of
New York to conduct a criminal investigation regarding Khan based on the
evidence elicited at the November 1993 evidentiary hearing. The Second
Preliminary Injunction also denied Khan's motion for a preliminary injunction
without prejudice, held that proxies and consents obtained by Khan prior to
corrective disclosure were null and void and ordered the Company to adjourn the
stockholders meeting from December 15, 1993 to February 1, 1994.
On February 1, 1994, the Company held its 1993 Annual Meeting of
Shareholders. The Khan proposals were soundly defeated; the Company received
over 90% of the votes cast.
On December 22, 1993, Khan filed a notice of appeal from a prior
injunction granted by the court, to the Court of Appeals for the Second
Circuit. On March 13, 1994, that appeal was dismissed on the grounds that Khan
had defaulted for failure to comply with the Court's scheduling order.
Management believes that Khan's counterclaim is without merit and the Company
intends to vigorously defend this matter.
The Company is a party to a number of other pending or threatened
lawsuits arising out of, or incident to, its ordinary course of business. In
the opinion of management, these other pending lawsuits will not have a
material adverse effect on the consolidated financial position or operations of
the Company.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of ICN are as follows:
YEAR
COMMENCED
SERVICE
WITH
NAME AGE COMPANY POSITION
---- --- --------- --------
Milan Panic 64 1960 Chairman of the Board, President,
Chief Executive Officer
Adam Jerney 51 1973 Executive Vice President
John Giordani 51 1986 Executive Vice President Finance
and Chief Financial Officer
Bill A. MacDonald 46 1982 Executive Vice President Tax and
Corporate Development
David C. Watt 41 1988 Senior Vice President, General
Counsel and Secretary
Executive officers are elected annually and serve at the pleasure of the
Board of Directors. Certain officers of ICN are also officers of Viratek, SPI
and Biomedicals. The Company has adopted a charter provision which limits the
monetary liability under certain circumstances of its directors and, as a
matter of policy, enters into indemnification agreements with certain of its
officers and directors to the full extent permitted under Delaware law.
ICN has entered into Employment Agreements with certain senior executives
of ICN and its subsidiaries, including certain employees of the Company. Mr.
Milan Panic has an Employment Agreement with ICN which expires in November
1994. Messrs. Jerney, Giordani, Watt, and MacDonald have Employment Agreements
which are intended to retain the services of these executives for continuity of
management in the event of any actual or threatened change in control. Each
agreement has an initial term of three years and is automatically extended for
one year terms unless either the employee or the Company elects not to extend
it.
Mr. Panic is the founder of the Company and has been Chairman of the
Board, President and Chief Executive Officer since the Company's inception in
1960, except he did not serve as President from October 16, 1979 to June 30,
1980. Mr. Panic is also Chairman of the Board and Chief Executive Officer of
SPI, Biomedicals and Viratek. On July 14, 1992, Mr. Panic became Prime
Minister of Yugoslavia and, with the approval of the Company's Board of
Directors, took a leave of absence from all duties at the Company while
retaining his title as Chairman of the Board. Mr. Panic, with the approval of
the respective Boards of Directors of those companies, has taken similar leaves
of absence from SPI, Viratek and Biomedicals. Mr. Panic and each of the
companies, ICN, SPI, Viratek and Biomedicals, entered into an agreement
providing for Mr. Panic's reemployment as Chief Executive Officer upon
termination of the leave of absence. Under a license from the United States
government, Mr. Panic, an American citizen, was permitted to serve as Prime
Minister of Yugoslavia without violating applicable United States laws and
regulations concerning sanctions imposed against the Federal Republic of
Yugoslavia (Serbia and Montenegro). The license restricted Mr. Panic from
engaging in any business with the Company and its affiliates. On March 4,
1993, Mr. Panic completed his service as Prime Minister and returned to the
Company as President and Chief Executive Officer.
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21
Mr. Jerney is the Company's Executive Vice President. From July 14, 1992
through March 4, 1993, Mr. Jerney served as interim President and Chief
Executive Officer during Mr. Panic's absence. He joined ICN in 1973 as
Director of Marketing Research in Europe, and assumed the position of general
manager of ICN Netherlands in 1975. In December 1978, he was appointed
President of the European Pharmaceutical Group. In May 1981, he was elected
Vice President-Operations and in March 1987, President of SPI. Prior to
joining ICN he spent four years with F. Hoffmann-LaRoche & Company. Mr.
Jerney's primary duties are as President of SPI. He devotes insubstantial time
as an officer of the Company.
Mr. Giordani is the Company's Executive Vice President--Finance and Chief
Financial Officer. He is also Senior Vice President and Chief Financial
Officer of Biomedicals and Vice President--Finance and Chief Financial Officer
of Viratek. He joined the Company in June 1986 after serving as Vice President
and Corporate Controller of Revlon, Inc. in New York, New York since February
1982. From 1978 until February 1982 he held Deputy and Assistant Corporate
Controller positions with Revlon, Inc. He was with Peat, Marwick, Mitchell &
Co. from 1969 to 1978. Mr. Giordani's primary duties are as Chief Financial
Officer of the Company. The time devoted to Biomedicals and Viratek is
insubstantial.
Mr. MacDonald is the Company's Executive Vice President of Taxes and
Corporate Development. He is also President of Biomedicals, effective March
18, 1993 which is currently his primary responsibility. He joined the Company
in March 1982 as Director of Taxes, has been a Vice President since 1982 and
Senior Vice President since 1982. From 1980 to 1982, he served as the Tax
Manager of Pertec Computer Corporation. From 1973 to 1980, he was Tax Manager
and Assistant Treasurer of Republic Corporation.
Mr. Watt is the Company's Senior Vice President, General Counsel and
Secretary. He joined the Company in March 1987 as Assistant General Counsel
and Secretary. He was elected Vice-President--Law and Secretary in December
1988. In 1989, Mr. Watt became General Counsel and Secretary of SPI. In
January 1992, Mr. Watt was promoted to Senior Vice President at ICN and SPI.
From 1986 to 1987, he was President and Chief Executive Officer of Unitel
Corporation. He also served as Executive Vice President and General Counsel
and Secretary of Unitel during 1986. From 1983 to 1986, he served with ICA
Mortgage Corporation as Vice President, General Counsel and Corporate
Secretary. Prior to that time, he served with Central Savings Association as
Assistant Vice President and Associate Counsel from 1981 to 1983 and as
Assistant Vice President from 1980 to 1981. Mr. Watt's primary
responsibilities are devoted to SPI. He devotes a portion of time to ICN and
an insignificant amount of time to Viratek.
19
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock is listed and traded on the New York Stock Exchange
(Symbol: ICN) and the Pacific Stock Exchange. The following table sets forth
the high and low sale prices of the Common Stock for the periods indicated, as
reported by the New York Stock Exchange--Composite Tape.
HIGH LOW
---- ---
Calendar 1993
First Quarter . . . . . . . . . . . . . . . . . . . . . $15 3/4 $ 5 7/8
Second Quarter. . . . . . . . . . . . . . . . . . . . . 13 3/4 8 7/8
Third Quarter . . . . . . . . . . . . . . . . . . . . . 12 7 5/8
Fourth Quarter. . . . . . . . . . . . . . . . . . . . . 11 7/8 7 3/8
Calendar 1992
First Quarter . . . . . . . . . . . . . . . . . . . . . $25 3/8 $14 1/2
Second Quarter. . . . . . . . . . . . . . . . . . . . . 15 7/8 9 3/4
Third Quarter . . . . . . . . . . . . . . . . . . . . . 12 7/8 6 5/8
Fourth Quarter. . . . . . . . . . . . . . . . . . . . . 10 1/4 5 3/4
As of March 30, 1994, there were 5,383 record holders of the Company's Common
Stock.
The Company has never paid cash dividends on the Common Stock. The Company
anticipates that for the foreseeable future its earnings, if any, will be
retained for use in its business and no cash dividends will be paid on the
Common Stock. The Board of Directors of the Company will continue to review
its dividend policy, and the amount and timing of any future dividends will
depend on profitability, the need to retain earnings for use in the development
of its business and other factors.
The Indentures pursuant to which the 12 7/8% Sinking Fund Debentures due July
15, 1998 (the "12 7/8% Debentures") and the 12 1/2% Senior Subordinated
Debentures due in 1999 (the "12 1/2% Debentures") were issued, restrict the
ability of ICN to declare cash dividends on, and to repurchase, shares of
Common Stock and future issuances of Preferred Stock. Under the most
restrictive provisions of the Indentures (related to the 12 7/8% Debentures)
the Company may not pay dividends or make distributions on its stock (other
than dividends or distributions payable solely in shares of its stock), or
purchase, redeem or otherwise acquire or retire any of its stock or permit any
of its publicly owned subsidiaries to purchase, redeem or otherwise acquire any
of the Company's stock (a) if an event of default (as defined in the Indenture)
exists under the Indenture, or (b) if, after giving effect thereto, the
aggregate amount of all such dividends, distributions, purchases and payments
declared or made after July 24, 1986 would exceed the sum of (i) 20% of the
Company's consolidated net income (as defined in the Indenture) subsequent to
May 31, 1986, (ii) the net proceeds to the Company from the issuance or sale
after July 24, 1986, of any shares of its Common Stock and capital stock of its
subsidiaries and of any convertible securities which have been converted into
its Common Stock, and (iii) $10,000,000.
20
23
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial data
for the years ended December 31, 1993, 1992 and 1991, the one month ended
December 31, 1990, and for each of the years in the two-year period ended
November 30, 1990. The financial information set forth below should be read in
conjunction with, and is qualified in its entirety by, the detailed information
and financial statements contained elsewhere in this Form 10-K (in thousands,
except per share data).
ONE
YEAR ENDED MONTH
---------------------------------- ENDED
DECEMBER 31, DEC 31, YEAR ENDED NOVEMBER 30,
---------------------------------- -------- ------------------------
1993(1) 1992 1991(2) 1990(3) 1990 1989
------- ---- ------- ------- ---- ----
STATEMENT OF OPERATIONS
DATA:
Net sales. . . . . . . $ 62,556 $551,766 $460,365 $14,944 $271,975 $185,489
Cost of sales. . . . . 27,631 253,596 225,234 7,596 121,628 80,520
-------- -------- -------- ------- -------- --------
Gross profit . . . . . 34,925 298,170 235,131 7,348 150,347 104,969
Selling, general and
administrative
expenses . . . . . . 43,690 224,235 152,947 7,592 108,178 80,584
Research and
development costs. . 5,571 10,718 6,588 407 5,048 14,322
Write-off of goodwill. -- 15,362 -- -- -- 56,551
Equity earnings in SPI (11,646) -- -- -- -- --
Gains on sales of
subsidiaries stock . (8,345) (37,744) (29,797) -- -- --
Translation and exchange
(gains) losses, net. (1,292) 21,648 4,517 -- 14,020 --
Interest expense, net. 18,962 25,563 34,321 2,507 27,075 17,524
Other expense, net(4). 1,079 15,187 29,479 1,006 11,518 26,922
Restructuring costs (5) -- 63,032 6,087 -- -- --
Unrealized (gains)
losses on marketable
securities . . . . . (200) 446 (475) -- 614 (4,425)
Provision (benefit) for
income taxes. . . . . (474) 9,967 6,574 (394) 6,860 2,086
Minority interests . . (523) 14,558 19,035 (336) 3,709 (1,898)
Income (loss) before
extraordinary income (11,897) (64,802) 5,855 (3,434) (26,675) (86,697)
Extraordinary income . 627 -- -- -- --
Net income (loss). . . (11,270) (64,802) 5,855 (3,434) (22,445) (81,961)
Per share information:
Income (loss) before
extraordinary incom (.60) (4.67) .40 (.29) (2.28) (6.36)
Extraordinary income. .03 -- -- -- -- --
Net income (loss)
applicable to common
stockholders . . . . (.57) (4.67) .40 (.29) (1.92) (6.01)
Weighted average common
stock outstanding and
dilutive common stock
equivalents. . . . . 19,813 14,010 12,829 11,707 11,776 13,683
21
24
BALANCE SHEET DATA (IN THOUSANDS):
As of December 31, As of November 30,
--------------------------------------------- -----------------------
1993(1) 1992(1) 1991 1990 1990 1989
------- ------- ---- ---- ---- ----
Total assets $207,856 $223,568 $575,086 $402,975 $408,214 $436,439
Working capital (6) 29,627 5,597 123,301 47,034 46,844 94,155
Long-term debt, less
current maturities 139,047 160,011 188,587 217,130 217,863 240,430
Stockholders' equity
(deficit) 4,020 (21,757) 16,456 8,094 12,082 33,226
(1) As a result of the decline in ICN's percentage of ownership in SPI, the
balance sheet of SPI was deconsolidated, effective December 31, 1992, and
the investment is included as a long-term investment accounted for using
the equity method of accounting. Results of operations of SPI are
included for the entire 1992 year as ICN's ownership fell below 50% in
December of 1992. See Note 17 of Notes to Consolidated Financial
Statements.
(2) Includes the results of Galenika, a subsidiary of SPI, from the effective
date of acquisition.
(3) The Company changed its fiscal year end from November 30 to December 31,
effective December 31,1991. For financial statement purposes, the
Company's separate results of operations for the monthof December 1990
are not reflected in the Statement of Operations but have been charged
directly to retained earnings.
(4) See Note 11 of Notes to Consolidated Financial Statements for details.
(5) See Note 14 of Notes to Consolidated Financial Statements for details.
(6) Includes, in 1993, $17,698,000 of cash and certificates of deposit
which is to be used exclusively Viratek for research and development
and its general working capital requirements.
22
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
INTRODUCTION
Effective December 31, 1992, ICN's ownership percentage of SPI fell below
50% resulting in the deconsolidation of SPI in the Company's consolidated
financial statements effective as of December 31, 1992. The investment in SPI
is currently accounted for using the equity method of accounting. The prior
year results of operations have not been restated. Unless otherwise indicated,
all references in this Management's Discussion to 1992 and 1991 include the
consolidated results of operations of SPI.
The Company has reported net losses for 1993 and 1992 of $11,270,000 and
$64,802,000, respectively, and net income for 1991 of $5,855,000. The loss in
1993 was lower than in 1992 primarily as a result of the absence of a
restructuring charge in 1993. The net loss in 1992 compared to net income in
1991 was primarily due to restructuring charges of $63,032,000 in 1992, related
to the write-off of intangibles associated with Flow and other acquisitions and
other charges associated with the Biomedicals restructuring, including the
increase in 1992 over 1991 of foreign translation losses of $17,131,000.
RESULTS OF OPERATION--1993, 1992 AND 1991
Following are the 1993 results of operations and a proforma ICN statement
of operations for 1992 as if SPI had been accounted for using the equity method
of accounting (000's omitted):
1993 1992
---- ----
Net sales 62,556 $78,328
Cost of sales 27,631 44,851
-------- -------
Gross profit 34,925 33,477
Selling, general and
administrative expenses 43,690 53,859
Restructuring costs -- 63,032
Research and development costs 5,571 2,882
Interest expense, net 18,962 22,776
Translation and exchange gains (1,292) (3,391)
Equity in earnings of SPI (11,646) (20,773)
Gains on sale of subsidiaries
common stock owned by ICN (8,345) (37,744)
Write off of goodwill -- 15,362
Other expense, net 879 13,552
-------- -------
Loss before income taxes, minority
interest and extraordinary income (12,894) (76,078)
Provision (benefit) for income taxes (474) 872
Minority interest (523) (12,148)
Extraordinary income 627 --
-------- --------
Net loss $(11,270) $(64,802)
======== ========
The following discussions of the results of operations gives effect to
the deconsolidation of SPI as if it had occurred at January 1, 1992.
23
26
Pharmaceuticals Group
Net royalties from the sales of Virazole by SPI were $5,903,000 for the
year 1993 compared to $5,448,000 for the year 1992. The increase in royalty
income was due to increased sales in Mexico resulting from the introduction of
ribavirin creme used for the treatment of herpes and additional marketing
efforts by SPI in 1993, which included offering volume discounts.
The equity in earnings of SPI decreased to $11,646,000 in 1993 compared
to $20,773,000 in 1992. This reduction was due to a reduction in SPI's net
income in 1993 compared to 1992 of $12,993,000 coupled with a reduction in the
Company's ownership interest in SPI, 48% at December 31, 1992 compared to 39%
at December 31, 1993.
The reduction in the net income of SPI in 1993 was primarily due to lower
results at Galenika. The income before provision for income taxes and minority
interest of Galenika was $310,000 in 1993 compared to $38,518,000 in 1992. The
United Nations sanctions on Yugoslavia and price controls imposed by the
Yugoslavian government have impacted the sales at Galenika, both in terms of a
decrease in unit sales and a change in product mix. Additionally, sales have
been adversely impacted by inflation and by larger and more frequent
devaluations in 1993 compared to the prior year. The raw materials that
Galenika imports are primarily used in the production of drugs. Due to
shortages of these materials, Galenika has shifted its production and sales
efforts to its veterinary and parapharmaceutical product lines. For the year
ended December 31, 1993, sales of drugs represented 73% of Galenika total sales
compared to 81% in the prior year. Additionally, cost of sales and other
expenses at Galenika have increased as a percentage of sales due to the impact
of price controls in Yugoslavia, higher labor costs and hyperinflation.
Consolidated net sales for 1992 rose to $476,118,000, an increase of
$111,760,000, or 31% over 1991. The majority of this increase, $101,121,000
was due to a full year of operations for Galenika, a 75% owned Yugoslav
subsidiary of SPI ("Galenika"), compared to only eight months results of
operations in 1991.
During 1991 and the first half of 1992, Galenika was able to increase its
prices in anticipation of inflation and currency devaluations, resulting in
higher sales levels when compared to the levels of inflation in Yugoslavia.
Thus, during this period, Galenika sales on a dollar basis were not
significantly impacted. However, beginning in the second half of 1992, sales
at Galenika have been somewhat depressed due to the effects of sanctions and
price controls in Yugoslavia. See Note 17 of Notes to Consolidated Financial
Statements.
During 1992, most of SPI's subsidiaries recorded improved sales over the
prior year. Sales in Mexico increased $6,963,000 or 17% compared to 1991,
primarily resulting from improved sales of injectable vitamins, Bedoyecta and
other key products. Sales in Spain increased $3,526,000 or 16% compared to
1991, due primarily to the introduction of new product lines.
Gross profit as a percentage of SPI net sales increased to 56% in 1992
from 52% in 1991. While SPI experienced gross profit increases in all of its
major subsidiaries, the largest increase was recorded at Galenika whose gross
profit increased to 53% in 1992 from 47% in 1991. The 1991 Galenika gross
profit was adversely impacted by the increase in cost of sales resulting from a
purchase accounting adjustment to inventory. Without this item, Galenika's
gross profit percentage remained constant in 1992 and 1991 at 53%. Excluding
the results of Galenika, the gross profit increased to 62% in 1992 from 60% in
1991 due primarily from improved product mix resulting from increased
Virazole(R) sales.
24
27
Biomedicals Group
Introduction. At the time of the 1989 acquisition of Flow Laboratories,
Inc. and Flow Laboratories B.V., together with their respective subsidiaries
("Flow"), Biomedicals believed that the distribution outlets acquired would
substantially increase Biomedicals' ability to compete in international markets
where it had no significant direct representation. Following the acquisition,
Biomedicals attempted to centralize the European marketing and distribution,
discontinue certain low margin product lines and shut down excess manufacturing
and distribution facilities. These efforts continued in 1992, at which time
Biomedicals completed a major restructuring plan. (See Restructuring Costs and
Special Charges, below).
During the latter part of 1992 and throughout 1993, Biomedicals realigned
its European operations including the distribution network and manufacturing,
resulting in reductions in selling, general and administrative costs.
Integration of Biomedicals' higher margin "core" product lines and elimination
of lower gross margin products have contributed to the increase in the overall
gross profit margins; however, such actions have not fully mitigated the
continuing decline in European sales. Biomedicals' North American sales have
remained stable.
Biomedicals is actively working on the introduction of new products,
primarily related to its diagnostic and instrumentation product lines and will
be introducing its Dosimetry product line in Europe and Canada. Biomedicals
expects these strategies to contribute to increased sales in 1994 and beyond.
Absent improvements in the 1994 European operating results, Biomedicals will
need to reassess its business strategy and prospects for its European business.
Net Sales. Net sales were $59,076,000, $75,648,000, and $96,007,000 in
1993, 1992 and 1991, respectively. Net sales were 22% lower in 1993 than in
1992 and 22% lower in 1992 than in 1991. The continuing decline in sales can
be attributed primarily to Biomedicals' European operations. This declining
trend is due to a variety of factors including the transition from a marketing
effort focused on an agency/distributor network to one based upon catalog
distribution, discontinuance of low gross profit margin product lines,
competitive pressures, delays in getting new products to markets, and a
continuing weakness in government funding for capital equipment purchases.
Cost of Sales. Product cost as a percentage of sales decreased to 47% in
1993 from 59% in 1992 and 54% in 1991. The decrease in product costs in 1993
reflects actions taken by Biomedicals to reduce costs beginning in the latter
part of 1992, as discussed further in Restructuring Costs and Special Charges,
below. Additionally during 1993, high cost products with lower margins were
eliminated, certain production facilities were consolidated or sold, other
excess manufacturing facilities were closed down and Biomedicals continued to
focus on improving purchasing and manufacturing processes. The increase in
product costs in 1992 as compared to 1991 is the result of a writedown of slow
moving inventory due to lower than anticipated sales volume. In addition
during 1992, the Biomedicals' production facilities and warehousing costs were
spread over a reduced sales volume thereby increasing cost of sales as a
percentage of sales.
Gross Profit. Gross profit as a percentage of sales was 53%, 41% and 46%
in 1993, 1992 and 1991, respectively. Actions taken by Biomedicals in 1992, as
described above, resulted in an increase in gross profit as a percentage of
sales during 1993. The impact of declining sales increasing product costs, and
a writedown of slow moving inventory, as described above, reduced gross profit
in 1992 as compared to 1991.
Restructuring Costs and Special Charges. During 1991, Biomedicals
initiated a restructuring program designed to reduce cost and improve operating
efficiencies. Accordingly, restructuring costs of $6,087,000 were recorded in
1991. The program included, among other items, the consolidation, relocation
and closure of certain manufacturing and distribution facilities, primarily in
Milan, Italy and Costa Mesa, California. Those measures, including a fifteen
percent reduction in work force, were initiated in 1991 and continued through
1992.
Biomedicals' sales continued to decline during the first three quarters
of 1992 over the same periods in 1991 despite the restructuring program
initiated in 1991. The significant decreases were primarily due to operations
in
25
28
Italy and other European subsidiaries acquired as part of the Flow
acquisition. A further decline in sales of 19.3% or $4,009,000, occurred in
the fourth quarter of 1992 compared to the fourth quarter of 1991.
In prior years and the first three quarters of 1992, recoverability of
goodwill associated with the Flow acquisition was focused, to a major extent,
on the European operations, as Biomedicals had only a limited presence in
Europe prior to the Flow acquisition. Biomedicals used the expected operating
income of the European operations in evaluating the recoverability of the Flow
goodwill.
During the fourth quarter of 1992, as a result of the continuing decline
in sales and other factors, Biomedicals reassessed its business plan and
prospects for 1993 and beyond which included, among other things, the decision
to sell the last remaining major European manufacturing facility and to
restructure the previously acquired distribution network and European
operations in line with the revised sales estimates. Consequently, based upon
the continuing decline in European revenue and profitability relating to Flow,
Flow facility closures and an ineffective distribution network, Biomedicals'
management concluded that there was no current or expected future benefit
associated from the Flow acquisition. Accordingly, Biomedicals wrote off the
goodwill and other intangibles, primarily from the Flow acquisition, in the
amount of $37,714,000.
In addition, Biomedicals determined that future benefit could be realized
if the distribution activities in Irvine, Scotland, Brussels, Belgium,
Cleveland, Ohio, and Horsham, Pennsylvania, were consolidated with other
distribution centers in Europe and the U.S., as these operations did not
support the costs of maintaining separate facilities. Estimated costs
associated with this consolidation effort were included in lease termination
costs of $1,434,000, employee termination costs of $1,961,000, facility shut
down costs of $357,000 and writedowns to net realizable value totalling
$1,106,000 of facilities held for disposition.
The Irvine, Scotland facility was vacated in March 1993 and subsequently
sold for a gain of $278,000. During the first quarter of 1993, the Horsham,
Pennsylvania and Cleveland, Ohio facilities moved to Aurora, Ohio.
Additionally, Biomedicals reviewed the ability of the Flow product lines
to be effectively integrated into Biomedicals' "core" product lines and vice
versa. As a result, it was concluded that Flow's distribution network, product
lines and business operations were not effectively integrated into Biomedicals'
global strategy. Low margin product lines such as cell biology and instruments
had become technologically obsolete given the other competitive products on the
market. As sales continued to decline the amount of slow moving and
potentially obsolete inventory increased. Accordingly, Biomedicals recorded a
provision for abnormal writedowns of inventory to estimated realizable value of
$9,924,000 and discontinued products of $3,377,000.
In addition, Biomedicals determined that the unamortized costs of the
catalog marketing program would not be recovered within a reasonable period of
time, therefore, it was determined that costs totaling $6,659,000 were written
off in the fourth quarter of 1992. Despite the general shortfall in catalog
related sales, the catalog marketing approach has firmly established
Biomedicals' "core" products in the European and Asian-Pacific markets. During
1993, Biomedicals' strategy to redefine the form and use of the catalog to
specifically customer focused or "product-line" catalogs is believed to be more
effective in light of current market conditions. Additionally, radiochemical
and cell biology "mini" catalogs have been developed. During 1993 and 1994
Biomedicals will continue to use general catalogs and associated direct mail
programs for sales activities in biochemical, enzyme immunobiological products
and reagents for electrophoresis, but with more focus on product movement and
customer needs. The diagnostic instrument and reagent lines will be promoted
by media advertising and direct sales activities.
Diagnostic product development activities are organized to provide an
enhanced range of non-isotopic tests, complimenting the existing radio-immuno
assays and microplate instrumentation. Biomedicals intends to remain a leader
in neonatal screening, and a significant supplier of endocrinology assay kits,
test reagents, and infectious disease diagnostics.
26
29
The Company
Selling, general and administrative expenses. Selling, general and
administrative expenses were $43,690,000 (70% of net sales), $224,235,000 (41%
of net sales), and $152,947,000 (33% of net sales) for 1993, 1992 and 1991,
respectively. Selling, general and administrative expenses (not including SPI)
decreased from $53,859,000 in 1992 to $43,690,000 in 1993. The decrease
reflects Biomedicals' efforts to reduce expenses through consolidation of
operations and distribution centers and cost controls. This was partially
offset by the increased legal costs in defense of the consolidated class action
suit and costs associated with the proxy fight initiated in 1993. The
increased expenses for 1992 (including SPI) compared to 1991 were primarily a
result of provisions for doubtful accounts of $48,279,000 (described below) and
termination of employees and early retirement costs at Galenika of $21,065,000.
Excluding these provisions, selling, general and administrative costs in 1992
were 28% of net sales. This decrease is primarily due to the lower selling
costs and wages at Galenika.
In hyperinflationary countries such as Yugoslavia, a devaluation will
result in a reduction of accounts receivable and a proportionate reduction in
the accounts receivable allowance. The reduction of accounts receivable is
recorded as a foreign currency translation loss and the reduction of the
allowance is recorded as a translation gain. After a devaluation the level of
accounts receivable will rise as a result of subsequent price increases. In
conjunction with the rise in receivables, additions to the allowance for
receivables will be made for existing doubtful accounts. This process will
repeat itself for each devaluation that occurs during the year. The effect of
this process results in a high level of bad debt expense that does not
necessarily reflect credit risk or difficulties in collecting receivables. In
1992, general and administrative expenses increased significantly due primarily
to provisions for doubtful accounts at Galenika of $48,279,000. The reduction
of the accounts receivable allowance from devaluations resulted in a
translation gain of $40,191,000 resulting in a net expense from bad debts and
bad debt translation gain of $8,088,000.
Research and development costs. Research and development costs were
$5,571,000, $10,718,000, and $6,588,000 for 1993, 1992 and 1991, respectively.
Research and development costs increased from $2,882,000 (not including SPI) in
1992 to $5,571,000 in 1993. The increase relates to the higher costs incurred
for the hepatitis C clinical trials during 1993 and the additional research and
development activities which involve a new pharmaceutical discovery program
aimed at developing therapeutic drugs to inhibit disease-causing genes.
Research and development costs rose in 1992 (including SPI) compared to 1991
due to expanded research at Galenika and, in 1992, the phase III clinical
trials of Viratek relating to hepatitis C.
Write-off of goodwill. During 1992, based upon the continuing evaluation
of the carrying value of goodwill, the Company made the determination to write
off pre November 1970 goodwill, relating primarily to Biomedicals, of
$12,062,000. In addition, as a result of the continuing decline in sales at
Biomedicals, the Company made the determination to write off $3,300,000 of
goodwill relating to purchased subsidiaries.
Gain on Sales of Subsidiaries Stock. During 1993, the Company sold
1,618,200 shares of SPI's common stock and 272,500 shares of Viratek common
stock for an aggregate sales price of $19,995,000 and $3,325,000, respectively,
in open market and privately negotiated transactions resulted in a gain of
$8,345,000. During 1992, the Company sold 1,890,000 shares of SPI's common
stock and 348,000 shares of Viratek common stock for an aggregate sales price
of $44,608,000 and $5,243,000, respectively, in open market and privately
negotiated transactions which resulted in a gain of $37,744,000. During 1991,
the Company sold 2,978,250 shares of SPI's common stock and 200,000 shares of
Viratek common stock for an aggregate sales price of $50,863,000 and
$2,790,000, respectively in open market and privately negotiated transactions
which resulted in a gain of $29,797,000.
Translation and exchange (gains) losses, net. Translation (gains)
losses, net were $(1,292,000), $21,648,000 and $4,517,000 in 1993, 1992 and
1991, respectively. Translation and exchange gains were $1,292,000 in 1993
compared to $3,391,000 (without SPI) in 1992. The decrease is due primarily
from the company's conversion of Swiss Franc, Dutch Guilder and ECU debt.
During 1992, translation and exchange losses,
27
30
net (including SPI) increased $17,131,000 over 1991 due to Galenika, a
subsidiary of SPI, operating in a highly inflationary economy, coupled with
reductions in the level of hard currency as a result of sanctions and the
current political and economic unrest.
Interest income and expense.
1993 1992 1991
Interest income. . . . . $( 627,000) $(6,844,000) $(1,550,000)
Interest expense . . . . 19,589,000 32,407,000 35,871,000
----------- ----------- -----------
Interest expense, net. . $18,962,000 $25,563,000 $34,321,000
=========== =========== ===========
Interest expense decreased from $23,406,000 (not including SPI) in 1992
to $19,589,000 in 1993. The decrease resulted from a reduced level of
outstanding debt. Interest expense, remained fairly constant between 1992 and
1991 (including SPI) as a result of a decrease in debt at ICN and Biomedicals
offset by an increase in debt at SPI. Interest income (not including SPI) in
1992 was $630,000 which was consistent with 1993. Interest income increased in
1992 from 1991 (including SPI) due primarily to Galenika's cash on deposit
outside of Yugoslavia.
Extraordinary Income. During the second quarter of 1993, Biomedicals'
Italian operation negotiated settlements with certain of its suppliers and
banks resulting in an extraordinary income of $627,000 or $.03 per share.
Other, net. A summary of other (income) and expense is as follows (1992
and 1991 includes SPI):
1993 1992 1991
Realized (gains) losses from sale of
marketable securities, net $ (139,000) $(228,000) $ 354,000
Amortization of goodwill . . . . . . . 2,102,000 4,216,000 3,944,000
Litigation settlements . . . . . . . . -- 1,247,000 7,143,000
Write-down of assets and intangibles . -- 2,000,000 --
Write-off of prepaid royalties . . . . -- -- 1,503,000
Write-downs and other costs for
domestic nutrition group . . . . . . -- -- 10,878,000
Facility relocation expenses in
Spain. . . . . . . . . . . . . . . . -- -- 2,198,000
Gain on lease termination. . . . . . . (938,000) -- --
Favorable settlement of a foreign
non-income tax related tax
dispute and accrued liabilities. . . (1,680,000) -- --
License fees . . . . . . . . . . . . . -- 2,187,000 --
Lease vacancy costs. . . . . . . . . . 1,436,000 -- --
Other, net . . . . . . . . . . . . . . 298,000 5,765,000 3,459,000
----------- ----------- -----------
Other expense, net . . . . . . . . . . $ 1,079,000 $15,187,000 $29,479,000
=========== =========== ===========
28
31
Litigation. Litigation settlement costs were $1,247,000 in 1992 and
$7,143,000 in 1991. The 1992 costs relate to the Baylor College of Medicine
arbitration award of $466,000 and additional costs of the Delagrange award.
The 1991 charge is attributed to the Delagrange arbitration award against the
Company of $7,143,000.
Write-Down of Assets. The Company consolidated certain of its operations
which resulted in the Company having several idle facilities which the Company
intends to sell. The facilities have been written down to their estimated net
realizable value which resulted in a charge to operations of $1,000,000 in
1992. In addition, in 1992 due to declining sales relating to Brown
Pharmaceutical products the Company wrote off $1,000,000 relating to the Brown
Trademark.
Write-downs and Other Costs for Domestic Nutritional Group. During 1991
the Company continued to reassess its domestic nutritional business, which had
a sales decline of 78% from 1988 to 1991. As a result, SPI wrote off
$10,878,000 of assets, principally goodwill and intangibles.
Gain on Lease Termination. During 1993, Biomedicals' Italian operation
realized a gain of $938,000 on the favorable termination of certain leasing
contracts.
Favorable Settlement of a Foreign Non-Income Tax Related Tax Dispute and
Accrued Liabilities. During 1993, Biomedicals recognized a gain of $430,000
representing a favorable settlement of a foreign non-income tax related tax
dispute and a gain of $1,250,000 relating to certain liabilities accrued during
1992 which were settled for less than the original estimate.
Lease Vacancy Costs. During 1993, Biomedicals vacated its High Wycombe
facility in England and moved to a facility more suitable to Biomedicals'
operating needs in Thames, England. Biomedicals pursued various subleasing
agreements for which none were consummated as of December 31, 1993.
Consequently, Biomedicals accrued approximately $1,200,000 which represents
management's best estimate of the net present value of future leasing costs to
be incurred for High Wycombe. During 1993, Biomedicals expensed an additional
$236,000 of leasing costs related to High Wycombe.
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
Cash and marketable securities. At December 31, 1993 and 1992, the
Company had cash, including restricted cash, certificates of deposit, and
marketable securities of $24,170,000 and $2,622,000, respectively, included in
current assets. Included in cash at December 31, 1993 is $17,698,000 which is
to be used exclusively by Viratek for research and development and its general
working capital requirements. In addition, included in non-current assets at
December 31, 1993 and 1992, respectively, are investments in non-current
marketable securities of $201,000 and $198,000. At December 31, 1993, the
Company had $5,823,000 of margin borrowings collateralized by stock of the
Company's subsidiaries owned by ICN.
During 1993, ICN sold 1,618,200 shares of SPI common stock for an
aggregate sales price of $19,995,000. During 1992, ICN sold 690,400 shares of
its SPI common stock and Galenika sold 1,200,000 shares of SPI common stock,
transferred in 1991, for an aggregate sales price of $44,608,000, resulting in
a net gain to ICN of $32,952,000. During 1993 and 1992, ICN sold 272,500 and
348,000 shares of Viratek common stock for an aggregate sales price of
$3,324,000 and $5,243,000, respectively, resulting in a gain of $2,647,000 and
$4,792,000, respectively.
In February 1993, Viratek successfully completed an offering in which it
sold 1,375,000 units for net proceeds of $8,897,000. Each unit consisted of
one share of common stock and one warrant to purchase one unit of common stock
at $10.075. In March 1993, the underwriters exercised their option to purchase
the overallotment (206,250 units) in connection with the public offering for
net proceeds of $1,368,000. The warrants became
29
32
separately transferable on July 29, 1993 and were exercisable until August 30,
1993 and redeemable by the Company on August 31, 1993 at $.05 per warrant, if
not previously exercised. Of the total outstanding warrants, 1,366,642 were
exercised resulting in net proceeds to the Company of $13,472,000. Viratek
intends to use the net proceeds for research and development activities to
fund phase III clinical trials and related project costs to evaluate Virazole
in the treatment of hepatitis C and to continue development of certain other
anti-cancer and immune-stimulatory compounds of which $7,485,000 has been spent
through December 31, 1993, respectively. The balance of the net proceeds will
be used for additional research and development activities and general working
capital purposes. The additional research and development involves a new
pharmaceutical discovery program aimed at developing therapeutic drugs to
inhibit disease-causing genes. This research activity, which involves 15 new
scientists, is based on antisense technology and is focused on designing new
pharmaceuticals to combat cancer, viral diseases and skin disorders.
During 1993 and 1992, the Company issued 3,000,000 and 4,198,000 shares
of its common stock for net proceeds of $21,861,000 and $30,608,000,
respectively.
During 1993 and 1992, the Company received cash payments from SPI
totalling $13,662,000 and $14,987,000, respectively.
During 1993, the Company's primary uses of cash were for the reduction
of long-term debt ($32,087,000), interest on its publicly traded debt
($15,628,000), legal and proxy fight expenses ($7,136,000), payments to
Biomedicals ($6,783,000), representing Biomedicals operating cash
deficiency and Viratek's research and development costs discussed above.
During 1994, the Company anticipates meeting its cash requirements
through royalty payments on the sales of ribavirin by SPI, dividends from SPI
and collection of the advances due from SPI and the remainder through the use
as collateral or additional sales of its common stock or common stock of its
subsidiaries or equity investment in order to meet its short term cash
requirements or other corporate goals. Management believes that these proceeds,
will be sufficient to meet its operating needs during 1994.
Capital Expenditures. Capital expenditures for property, plant and
equipment totaled $2,548,000 in 1993, $12,554,000 (including SPI) in 1992, and
$21,046,000 (including SPI) in 1991. The expenditures in 1992 primarily relate
to facility improvements of $2,556,000 at Galenika and facility expansion of
$4,700,000 at SPI's Mexican subsidiary. The expenditures in 1991 are primarily
related to the purchase and improvement of SPI's facility in Spain. The
Company does not expect significant capital expenditures through the end of
1994.
Taxes. The Company has not been required to pay regular federal income
taxes in recent years due to the availability of tax loss carryforwards.
However, in 1992, the Company was required to pay alternative minimum tax (AMT)
due to limitations on the utilization of net operating loss (NOL) carryforwards
for AMT purposes. The Company files its federal tax return on a stand-alone
basis. In prior years, the Company filed on a consolidated basis with its
subsidiaries until the following dates:
1992 1991
---- ----
SPI -- Until 8-13-91
Biomedicals -- --
Viratek Until 2-1-92 Entire year
30
33
Product Liability Insurance. In December 1985, after reviewing costs,
availability and related factors, management decided not to continue to
maintain product liability insurance in the United States subsequent to that
time. While the Company has never experienced a material adverse claim for
personal injury resulting from allegedly defective products, a substantial
claim, if successful, could have a material adverse effect on the Company's
liquidity and financial performance. See "Item 3. Legal Proceedings."
INFLATION AND CHANGING PRICES
Foreign operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, fluctuations
in the relative values of currencies, political instability and other
restrictive governmental actions. Changes in the relative value of currencies
occur from time to time and may, in certain instances, materially affect the
Company's results of operations.
FOREIGN CURRENCY TRANSLATION
The Company's Consolidated Statements of Operations reflect translation
(gains) losses of $(915,000), $21,648,000, and $4,517,0000, in 1993, 1992 and
1991 which are a result of the Company's foreign currency denominated
borrowings and investments and relative changes in the value of the U.S. Dollar
versus the Swiss Franc, West German Mark, British Pound, Dutch Guilder, Finland
Markka, and European Currency Unit in 1993. In addition to these currencies,
1992 and 1991 included the translation effects of the Yugoslavian Dinar.
ACCOUNTING PRONOUNCEMENTS
During November 1992, the Financial Accounting Standards Board ("FASB")
issued a new accounting standard for employers who provide benefits to former
or inactive employees after employment but before retirement, SFAS No. 112
("Employers' Accounting for Postemployment Benefits") which must be implemented
for fiscal years beginning after December 15, 1993. This standard is not
applicable to the Company as it does not offer benefits after employment but
before retirement.
During May 1993, the FASB issued a new accounting standard for accounting
for investments, SFAS No. 115 ("Accounting for Certain Investments in Debt and
Equity Securities"), which must be implemented for fiscal years beginning after
December 15, 1993. This standard is currently not applicable to the Company as
they do not have debt or equity securities as defined in SFAS No. 115.
31
34
QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of quarterly financial data for the years ended
December 31, 1993 and 1992 (in thousands, except per share amounts):
1993
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Net sales. . . . . . . . . . . . $16,632 $15,723 $15,815 $14,386
Gross profit . . . . . . . . . . 9,256 8,766 9,307 7,596
Income (loss) before
extraordinary income . . . . . 1,063 (3,593) (2,343) (7,024)
Extraordinary income . . . . . . -- 627 -- --
------- ------- ------- -------
Net income (loss). . . . . . . . 1,063 (2,966) (2,343) (7,024)
======= ======= ======= =======
Per share information:
Income (loss) before
extraordinary income . . . . .06 (.18) (.11) (.34)
Extraordinary income . . . . . -- .03 -- --
------- ------- ------- -------
Net income (loss). . . . . . . $ .06 $ (.15) $ (.11) $ (.34)
======= ======= ======= =======
1992
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Net sales. . . . . . . . . . . . $142,328 $170,136 $113,003 $126,299
Gross profit . . . . . . . . . . 74,120 93,403 64,326 66,321
Net income (loss) (1). . . . . . 6,590 3,206 (9,652) (64,946)
-------- -------- -------- --------
Per share information:
Net income (loss). . . . . . . $ .46 $ .21 $ (.69) $ (4.03)
======== ======== ======== ========
(1) Includes a pre-tax restructuring charge of $63,032,000 in the fourth
quarter 1992.
32
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
DECEMBER 31, 1993
PAGE
----
REGISTRANT:
Report of independent auditor. . . . . . . . . . . . . . . . . . . . . . .34
Financial Statements:
Consolidated balance sheets at December 31, 1993 and 1992 . . . . . . . .35
For the years ended December 31, 1993, 1992 and 1991:
Consolidated statements of operations. . . . . . . . . . . . . . . . . .36
Consolidated statements of stockholders' equity (deficit). . . . . . . .37
Consolidated statements of cash flows. . . . . . . . . . . . . . . . . .38
Notes to consolidated financial statements . . . . . . . . . . . . . . .39
Schedules supporting the financial statements for the years ended
December 31, 1993, 1992 and 1991:
III -- Condensed Financial Information of Parent Company. . . . . . . .74
VIII -- Valuation and qualifying accounts. . . . . . . . . . . . . . . .78
IX -- Short-term borrowings. . . . . . . . . . . . . . . . . . . . . .79
X -- Supplementary income statement information . . . . . . . . . . .80
All other schedules are not submitted because either they are not
applicable, not required or because the information required is included in the
Consolidated Financial Statements, including the notes thereto.
SEPARATE FINANCIAL STATEMENTS OF 50 PERCENT OR LESS OWNED COMPANY:
Report of Independent auditor. . . . . . . . . . . . . . . . . . . . . . .81
Financial Statements:
Consolidated balance sheets at December 31, 1993 and 1992. . . . . . . . .82
For the years ended December 31, 1993, 1992 and 1991:
Consolidated statements of income. . . . . . . . . . . . . . . . . . . .83
Consolidated statements of stockholders' equity. . . . . . . . . . . . .84
Consolidated statements of cash flows. . . . . . . . . . . . . . . . . .85
Notes to consolidated financial statements . . . . . . . . . . . . . . .86
Schedules supporting the financial statements for the years ended
December 31, 1993, 1992 and 1991:
I -- Marketable Securities . . . . . . . . . . . . . . . . . .106
VIII -- Valuation and qualifying accounts. . . . . . . . . . . . .107
IX -- Short-term borrowings. . . . . . . . . . . . . . . . . . .108
X -- Supplementary income statement information . . . . . . . .109
All other schedules are not submitted because they are not applicable,
not required or because the information required is included in the
Consolidated Financial Statements, including the notes thereto.
33
36
REPORT OF INDEPENDENT AUDITORS
To ICN Pharmaceuticals, Inc.:
We have audited the consolidated financial statements and the financial
statement schedules of ICN Pharmaceuticals, Inc. (a Delaware corporation) and
subsidiaries listed on the index on page 33 of this Form 10-K. These
consolidated financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
The Company has had certain transactions with its majority owned subsidiaries
and affiliates as more fully described in Notes 2, 3, 4, 5 and 6 to the
consolidated financial statements. Whether the terms of these transactions
would have been the same had they been between wholly unrelated parties cannot
be determined.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ICN
Pharmaceuticals, Inc. and subsidiaries as of December 31, 1993 and 1992, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1993, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
As discussed in Note 1, effective December 31, 1992, the Company changed to the
equity method of accounting for a previously consolidated subsidiary.
COOPERS & LYBRAND
Los Angeles, California
March 30, 1994
34
37
ICN PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1993 and 1992
ASSETS
1992
----
1993 (Note 1 and 17)
---- ---------------
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . $14,652,000 $2,333,000
Restricted cash. . . . . . . . . . . . . . . . . . . 1,518,000 262,000
Certificates of deposit. . . . . . . . . . . . . . . 8,000,000 --
Receivables, less allowances of $2,400,000
in 1993 and $3,353,000 in 1992 . . . . . . . . . . 12,122,000 18,620,000
Receivables from SPI . . . . . . . . . . . . . . . . 18,313,000 20,160,000
Other receivables. . . . . . . . . . . . . . . . . . -- 8,704,000
Inventories, net . . . . . . . . . . . . . . . . . . 15,601,000 13,499,000
Prepaid expenses and other current assets. . . . . . 4,479,000 15,366,000
------------ -----------
Total current assets . . . . . . . . . . . . . 74,685,000 78,944,000
Property, plant and equipment, net, at cost. . . . . 36,243,000 34,113,000
Receivables from SPI, less current portion . . . . . -- 10,273,000
Marketable securities. . . . . . . . . . . . . . . . 201,000 198,000
Investment in SPI. . . . . . . . . . . . . . . . . . 71,671,000 72,569,000
Investment in other equity securities. . . . . . . . 4,230,000 4,273,000
Other assets and deferred charges. . . . . . . . . . 7,594,000 9,607,000
Goodwill related to purchased businesses . . . . . . 2,580,000 2,933,000
Goodwill related to publicly traded subsidiaries . . 10,652,000 10,658,000
------------ ------------
$207,856,000 $223,568,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable. . . . . . . . . . . . . . . . . . . . $ 4,226,000 $ 15,277,000
Current maturities of long-term debt . . . . . . . . 12,093,000 12,499,000
Accounts payable . . . . . . . . . . . . . . . . . . 7,342,000 13,055,000
Accrued liabilities. . . . . . . . . . . . . . . . . 21,397,000 32,516,000
------------ ------------
Total current liabilities. . . . . . . . . . . 45,058,000 73,347,000
Long-term debt, less current maturities:
Convertible into ICN common stock. . . . . . . . . 22,023,000 39,507,000
Publicly-traded debentures and other long-
term debt. . . . . . . . . . . . . . . . . . . . 117,024,000 120,504,000
Other liabilities and deferred income taxes. . . . . 7,014,000 9,348,000
Minority interests . . . . . . . . . . . . . . . . . 12,717,000 2,619,000
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $1.00 par value; 3,000,000
shares authorized, none outstanding. . . . . . . . -- --
Common stock, $1.00 par value; 100,000,000
shares authorized, 20,519,431 shares
outstanding at December 31, 1993 and
16,452,313 at December 31, 1992. . . . . . . . . . 20,519,000 16,452,000
Additional capital . . . . . . . . . . . . . . . . . 180,897,000 145,928,000
Accumulated deficit. . . . . . . . . . . . . . . . . (193,711,000) (182,441,000)
Foreign currency translation adjustments . . . . . . (3,685,000) (1,696,000)
------------ ------------
Total stockholders' equity (deficit) . . . . . 4,020,000 (21,757,000)
------------ ------------
$207,856,000 $223,568,000
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
35
38
ICN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
1993 1992 1991
Net sales. . . . . . . . . . . . . . . $ 62,556,000 $551,766,000 $460,365,000
Cost of sales. . . . . . . . . . . . . 27,631,000 253,596,000 225,234,000
------------ ------------ ------------
Gross profit . . . . . . . . . . . . . 34,925,000 298,170,000 235,131,000
Selling, general and
administrative expenses. . . . . . . 43,690,000 224,235,000 152,947,000
Research and development costs . . . . 5,571,000 10,718,000 6,588,000
Interest expense . . . . . . . . . . . 19,589,000 32,407,000 35,871,000
Interest income. . . . . . . . . . . . (627,000) (6,844,000) (1,550,000)
Translation and exchange (gains) losses,
net. . . . . . . . . . . . . . . . . (1,292,000) 21,648,000 4,517,000
Restructuring costs and special charges -- 63,032,000 6,087,000
Other expense, net . . . . . . . . . . 1,079,000 15,187,000 29,479,000
Equity earnings in SPI . . . . . . . (11,646,000) -- --
Gains on sales of subsidiaries stock . (8,345,000) (37,744,000) (29,797,000)
Write-off of goodwill. . . . . . . . . -- 15,362,000 --
Unrealized (gains) losses on marketable
securities . . . . . . . . . . . . . (200,000) 446,000 (475,000)
------------ ------------ ------------
Income (loss) before provision
for income taxes, minority
interest and extraordinary income. . (12,894,000) (40,277,000) 31,464,000
Provision (benefit) for income taxes . (474,000) 9,967,000 6,574,000
Minority interests . . . . . . . . . . (523,000) 14,558,000 19,035,000
------------ ------------ ------------
Income (loss) before extraordinary
income . . . . . . . . . . . . . . . (11,897,000) (64,802,000) 5,855,000
Extraordinary income . . . . . . . . . 627,000 -- --
------------ ------------ ------------
Net income (loss). . . . . . . . . . . $(11,270,000) $(64,802,000) $ 5,855,000
============ ============ ============
Per share information:
Income (loss) before extraordinary
income . . . . . . . . . . . . . . . $(0.60) $(4.67) $ .40
Extraordinary income . . . . . . . . . 0.03 -- --
------ ------ -----
Net income (loss). . . . . . . . . . . $(0.57) $(4.67) $ .40
====== ====== =====
The accompanying notes are an integral part of these consolidated financial
statements.
36
39
ICN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
FOREIGN
CURRENCY
COMMON ADDITIONAL ACCUMULATED TRANSLATION
STOCK CAPITAL DEFICIT ADJUSTMENTS TOTAL
------ ---------- ----------- ----------- -----
BALANCE AT NOVEMBER 30,
1990 . . . . . . . . . . $11,707,000 $117,059,000 $(120,060,000) $3,376,000 $12,082,000
Net loss for month of
December, 1990 . . . . . -- -- (3,434,000) -- (3,434,000)
Translation adjustments. . -- -- -- (159,000) (159,000)
Proceeds from exercise
of stock options . . . . 353,000 706,000 -- -- 1,059,000
Subsidiaries' stock
transactions . . . . . . -- 1,053,000 -- -- 1,053,000
Net income . . . . . . . . -- -- 5,855,000 -- 5,855,000
----------- ------------ ------------- ----------- -----------
BALANCE AT DECEMBER 31,
1991 . . . . . . . . . . 12,060,000 118,818,000 (117,639,000) 3,217,000 16,456,000
Translation adjustments. . -- -- -- (4,913,000) (4,913,000)
Proceeds from exercise
of stock options . . . . 184,000 469,000 -- -- 653,000
Issuance of stock. . . . . 4,198,000 26,410,000 -- -- 30,608,000
Conversion of long-term
debt . . . . . . . . . . 10,000 105,000 -- -- 115,000
Subsidiaries' stock
transactions . . . . . . -- 126,000 -- -- 126,000
Net loss . . . . . . . . -- -- (64,802,000) -- (64,802,000)
----------- ------------ ------------- ----------- -----------
BALANCE AT DECEMBER 31,
1992 . . . . . . . . . . 16,452,000 145,928,000 (182,441,000) (1,696,000) (21,757,000)
Translation adjustments. . -- -- -- (1,989,000) (1,989,000)
Proceeds from exercise
of stock options . . . . 1,067,000 2,235,000 -- -- 3,302,000
Issuance of stock. . . . . 3,000,000 18,861,000 -- -- 21,861,000
Subsidiaries' stock
transactions . . . . . . -- 13,873,000 -- -- 13,873,000
Net loss . . . . . . . . . -- -- (11,270,000) -- (11,270,000)
----------- ------------ ------------- ----------- -----------
BALANCE AT DECEMBER 31,
1993 . . . . . . . . . . $20,519,000 $180,897,000 $(193,711,000) $(3,685,000) $ 4,020,000
=========== ============ ============= =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
37
40
ICN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991
1993 1992 1991
---- ---- ----
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . $(11,270,000) $(64,802,000) $ 5,855,000
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization. . . . . . . 7,362,000 17,610,000 16,166,000
Loss on sales of fixed assets . . . . . . 14,000 1,335,000 575,000
Gains on sale of subsidiaries' stock . . . (8,345,000) (37,744,000) (29,797,000)
Write-off of goodwill, intangibles
and assets. . . . . . . . . . . . . . . -- 17,362,000 1,664,000
Other realized and unrealized (gains)
losses . . . . . . . . . . . . . . . . . (339,000) 218,000 (121,000)
Extraordinary income . . . . . . . . . . . (627,000) -- --
Provision for losses on accounts
receivable . . . . . . . . . . . . . . . 168,000 50,563,000 6,760,000
Minority interests . . . . . . . . . . . . (523,000) 14,558,000 19,035,000
Exchange (gains) losses. . . . . . . . . . (1,292,000) 11,348,000 4,517,000
Restructuring costs and other charges. . . -- 63,032,000 6,087,000
Equity in earnings of SPI. . . . . . . . . (11,646,000) -- --
Lease vacancy costs. . . . . . . . . . . . 1,200,000 -- --
Gain on settlement of certain lease
contracts . . . . . . . . . . . . . . . (938,000) -- --
Gain on settlement of certain liabilities
for less than original estimate . . . . . (1,250,000) -- --
Other non-cash items . . . . . . . . . . . (855,000) (125,000) 345,000
Change in assets and liabilities net of
effects from deconsolidation of subsidiary:
(Increase) decrease in receivables . . . 13,271,000 14,684,000 (61,183,000)
(Increase) decrease in inventory . . . . (2,102,000) (24,154,000) 18,935,000
(Increase) decrease in prepaid
and other current assets . . . . . . . (739,000) (9,461,000) (12,592,000)
Increase (decrease) in accounts payable
and accrued expenses . . . . . . . . . (17,897,000) (70,076,000) 24,277,000
------------ ------------ ------------
Net cash provided by (used in)
operating activities . . . . . . . . . (35,808,000) (15,652,000) 523,000
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . (2,548,000) (12,554,000) (21,046,000)
Proceeds from sale of assets . . . . . . . 5,207,000 1,342,000 805,000
Sale of subsidiaries' stock. . . . . . . . 23,319,000 49,851,000 53,653,000
Issuance of subsidiary stock . . . . . . . 24,098,000 2,552,000 3,771,000
Purchase of certificate of deposit . . . . (8,000,000) -- --
Marketable securities sold, net. . . . . . 139,000 733,000 4,147,000
Payment received from SPI. . . . . . . . . 13,662,000 -- --
Equity investment. . . . . . . . . . . . . -- (53,254,000) --
Other, net . . . . . . . . . . . . . . . . (219,000) 2,853,000 (799,000)
------------ ------------ ------------
Net cash provided by (used in)
investing activities . . . . . . . . 55,658,000 (8,477,000) 40,531,000
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from borrowings . . . . . . . . . 954,000 26,665,000 19,843,000
Principal payments on debt . . . . . . . . (32,087,000) (42,235,000) (50,257,000)
Proceeds from stock issuances. . . . . . . 25,163,000 31,261,000 1,059,000
Dividends paid to minority shareholders. . (351,000) (8,062,000) --
Increase in restricted cash. . . . . . . . (1,256,000) -- --
Other, net . . . . . . . . . . . . . . . . -- -- 4,221,000
------------ ------------ ------------
Net cash provided by (used in)
financing activities . . . . . . . . (7,577,000) 7,629,000 (25,134,000)
------------ ------------ ------------
Effect of exchange rate on cash. . . . . . . 46,000 (272,000) 159,000
------------ ------------ ------------
Net increase (decrease) in cash. . . . . . . 12,319,000 (16,772,000) 16,079,000
Cash at beginning of year. . . . . . . . . . 2,333,000 19,105,000 3,026,000
------------ ------------ ------------
Cash at end of year. . . . . . . . . . . . . $14,652,000 $ 2,333,000 $ 19,105,000
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
38
41
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
Principles of consolidation
The accompanying consolidated financial statements include ICN
Pharmaceuticals, Inc. ("ICN"), its 69%-owned subsidiary ICN Biomedicals, Inc.
("Biomedicals"), its 63%-owned subsidiary Viratek, Inc. ("Viratek") and its
39%-owned equity investment in SPI Pharmaceuticals, Inc. ("SPI"). The sale of
approximately 9% of SPI's common stock by ICN throughout 1992 reduced ICN's
ownership interest in SPI and resulted in the deconsolidation of SPI at
December 31, 1992, the approximate time at which ICN's ownership fell below
50%. The continuing investment in SPI was classified as a long-term asset in
the consolidated balance sheet and income or loss was, commencing January 1,
1993, recognized using the equity method of accounting. Prior year results
have not been restated (see Note 17). All significant intercompany account
balances and transactions have been eliminated.
Goodwill
The difference between the purchase price and the fair value of net assets
purchased at the date of acquisition is included in the accompanying
consolidated balance sheets as Goodwill. Goodwill amortization periods range
from 5 to 40 years for acquired businesses and from 10 to 20 years for its
publicly-traded subsidiaries and is based on an estimate of future periods to
be benefitted. The Company periodically evaluates the carrying value of
goodwill including the amortization periods. The Company determines whether
there has been permanent impairment in goodwill, as well as, the amount of such
impairment, if any, by comparing the anticipated undiscounted future operating
income of the acquired entity with the carrying value of the Goodwill. During
1992, the Company wrote off a substantial portion of its goodwill, primarily
related to the acquisition by Biomedicals of Flow, as more fully described in
Note 14. In addition, on certain portions of goodwill, the amortization period
was reduced to primarily five years, which reflects the estimated recovery
period.
Accumulated amortization for goodwill related to purchased businesses was
$2,901,000 and $2,548,000 at December 31, 1993 and 1992, respectively.
Accumulated amortization for goodwill related to publicly traded subsidiaries
was $4,625,000 and $3,413,000 at December 31, 1993 and 1992, respectively.
Cash
For purposes of the statements of cash flows, the Company considers highly
liquid investments purchased with a maturity of three months or less to be cash
equivalents. The carrying amount of those assets approximates fair value due
to the short-term maturity of these instruments. Included in cash and
certificates of deposit at December 31, 1993, is $9,698,000 and $8,000,000,
respectively, which is to be used exclusively by Viratek for research and
development and its general working capital requirements.
39
42
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
Marketable securities
Marketable securities, which consist of investments in common stocks
and bonds, are carried at the lower of aggregate cost or market. The Company
realized net (gains) losses of $(139,000), $228,000, and $354,000 related to
marketable securities sold during 1993, 1992 and 1991, respectively.
Unrealized (gains) losses of $(200,000), $446,000 and $(475,000) were recorded
in 1993, 1992 and 1991, respectively.
Inventories
Inventories, which include material, direct labor and factory overhead,
are stated at the lower of cost or market. Cost is determined based on a
first-in, first-out (FIFO) basis.
Catalog Costs
The initial costs of design, production and distribution of the Company's
product catalog are deferred and amortized over its service life, approximately
one year. However, for the year ended December 31, 1992, due to the lower than
expected sales results, Biomedicals wrote-off these costs in the fourth quarter
of 1992. (See Note 14.)
Property, plant and equipment
The Company uses primarily the straight-line method for depreciating
property, plant and equipment over their estimated useful lives. Buildings and
related improvements are depreciated from 20-40 years, machinery and equipment
over 2-10 years, furniture and fixtures over 1-10 years, and leasehold
improvements, including property under capital leases, are amortized over their
useful lives limited to the life of the lease.
The Company follows the policy of capitalizing expenditures that
significantly increase the life of the related assets and charging maintenance
and repairs to expense. Upon sale or retirement, the costs and related
accumulated depreciation or amortization are eliminated from the respective
accounts, and the resulting gain or loss is included in income.
Notes Payable
The Company classifies bank borrowings with initial terms of one year
or less as Notes Payable. These notes bear interest at rates of 6.0% to 16.2%.
The carrying amount of Notes Payable approximates fair value due to the
short-term maturity of these instruments.
Foreign Currency Translation
The assets and liabilities of the Company's foreign operations, except
those in highly inflationary economies, are translated at the end of period
exchange rates. Revenues and expenses are translated at the average exchange
rates prevailing during the period. The effects of unrealized exchange rate
fluctuations on translating foreign currency assets and liabilities into U.S.
dollars are accumulated in stockholders' equity. The monetary assets and
liabilities of foreign subsidiaries in highly inflationary economies are
remeasured into U.S. dollars at the year-end exchange rates and non-monetary
assets and liabilities at historical rates. In
40
43
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
accordance with Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation," the Company has included in operating income all
foreign exchange gains and losses arising from foreign currency transactions
and the effects of foreign exchange rate fluctuations on subsidiaries operating
in highly inflationary economies. The (gains) losses included in operations
from foreign exchange translation and transactions for 1993, 1992 and 1991
were $(1,292,000), $21,648,000 (including SPI), and $4,517,000 (including
SPI), respectively.
Income Taxes
In January 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, (SFAS 109) "Accounting for Income Taxes". SFAS 109 is an
asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequence of events that
have been recognized in the Company's financial statements or tax returns. In
estimating future tax consequences, SFAS 109 generally considers all expected
future events other than enactment of changes in the tax law or rates.
Previously, the Company used the SFAS 96 asset and liability approach that gave
no recognition to future events other than the recovery of assets and
settlement of liabilities at their carrying amounts. The adoption of SFAS 109
did not result in a cumulative effect adjustment in the statement of
operations.
Per share information
Per share information is based on the weighted average number of common
shares outstanding and dilutive common share equivalents (19,813,000 in 1993,
14,010,000 in 1992 and 12,829,000 in 1991). Common share equivalents in 1991
represent shares issuable for outstanding options and warrants, on the
assumption that the proceeds would be used to repurchase shares in the open
market. Shares issuable for outstanding options and warrants in 1993 and 1992
were excluded since the effect would have been antidilutive. For purposes of
calculating per share information, ICN's share of the income of subsidiaries
has been reduced to give effect to the dilution in earnings which would result
upon the exercise of options and warrants currently outstanding to purchase
subsidiaries' common shares.
2. SPI PHARMACEUTICALS, INC.
SPI develops, manufactures, sells and distributes pharmaceutical and
nutritional products and services in the United States, Yugoslavia, Canada,
Mexico and Western Europe.
During 1991, ICN sold 2,978,250 shares of SPI common stock for an
aggregate sales price of $50,863,000, resulting in a net gain of $27,239,000
and used 1,468,000 shares in the acquisition of Galenika (see Note 6). During
1992, ICN sold 690,400 shares of SPI common stock and Galenika sold 1,200,000
shares of SPI common stock, transferred in 1991, for an aggregate sales price
of $44,608,000, resulting in a net gain of $32,952,000. During 1993, ICN sold
1,618,200 shares of SPI common stock for an aggregate sales price of
$19,995,000, resulting in a net gain of $5,698,000. The above noted 1992 and
1993 sales of SPI stock have reduced ICN's ownership of SPI from 57% at
December 31, 1991 to 48% at December 31, 1992 and 39% at December 31, 1993.
As a result, effective December 31, 1992, SPI is accounted for by using the
equity method of accounting.
41
44
At December 31, 1993, the investment in SPI exceeded the equity in net
assets of SPI by $11,024,000, which amount, is being amortized over 40 years.
On November 15, 1993, SPI exchanged $3,075,000 of debt owed to ICN for
200,000 shares of SPI's common stock issued to ICN at a price of $15.38 per
share which represented the closing market price of SPI's stock on that date.
SPI has granted options for the purchase of 2,508,315 shares of its common
stock. At December 31, 1993, ICN's percentage ownership of SPI would have
decreased from 39% to 35% if these options were exercised.
At December 31, 1993, ICN owned 7,853,454 shares of SPI common stock which
had an aggregate value of approximately $113,875,000, based upon the quoted
market price per share of SPI common stock at that date. This amount, however,
is not necessarily indicative of the realizable value in the open market.
3. VIRATEK, INC.
Viratek's primary purpose is to conduct research and development on
compounds derived from nucleic acids and to develop new biomedical and
diagnostic products.
During 1993, 1992 and 1991, ICN sold 272,500, 348,000 and 200,000 shares
of Viratek common stock for an aggregate sales price of $3,325,000, $5,243,000
and $2,790,000, respectively, resulting in a gain of $2,647,000, $4,792,000 and
$2,558,000, respectively. These sales, in addition to shares issued in
connection with the exercise of employee stock options and the shares issued in
the offering discussed below, have reduced ICN's ownership from 83% at January
1, 1991, to 63% at December 31, 1993.
In February 1993, Viratek successfully completed an offering in which it
sold 1,375,000 units for net proceeds of approximately $8,897,000. Each unit
consists of one share of common stock and one warrant to purchase one unit of
common stock at $10.075. On March 19, 1993, the underwriters exercised their
option to purchase the overallotment (206,250 units) in connection with the
public offering for net proceeds of $1,368,000. The warrants became separately
transferable on July 29, 1993 and were exercisable until August 30, 1993 and
redeemable by the Company on August 31, 1993 at $.05 per warrant if not
previously exercised. A total of 1,366,642 warrants were exercised resulting
in net proceeds to the Company of $13,472,000.
Goodwill related to publicly traded subsidiaries at December 31, 1993
includes $6,677,000, net of amortization, related to purchases of Viratek
common stock.
Viratek has granted options for the purchase of 877,222 shares of its
common stock. At December 31, 1993, ICN's percentage ownership of Viratek
would have decreased from 63% to 60% if these options were exercised. In
December 1993, Viratek declared a stock dividend of 5%.
42
45
4. ICN BIOMEDICALS, INC.
Biomedicals manufactures and distributes research chemical products, cell
biology products, chromatography materials, immunology instrumentation,
environmental technology products, precision liquid delivery instrumentation
and immunodiagnostic reagents and instrumentation in the United States, Canada,
Mexico, South America, Eastern and Western Europe, Australia and Japan.
Biomedicals also purchases research chemicals from other manufacturers, in
bulk, for repackaging and distributes biomedical instrumentation manufactured
by others.
During the second quarter of 1993, Biomedicals' Italian operation
negotiated settlements with certain of its suppliers and banks resulting in an
extraordinary income of $627,000 or $.03 per share.
On December 31, 1992, Biomedicals exchanged, in a non-cash transaction,
$11,250,000 of debt owed to ICN in exchange for 3,214,286 shares of
Biomedicals' common stock issued to ICN at a price of $3.50 per share which
represented the closing market price of the stock at that date.
On December 31, 1992, Biomedicals transferred $5,747,000 of debt owed to a
major supplier to ICN. ICN became primarily liable for the debt and
Biomedicals became guarantor.
On April 1, 1992, Biomedicals transferred, in a non-cash transaction,
$13,072,000 of debt with First City Bank of Texas- Houston N.A., to ICN.
Biomedicals, in exchange, issued 2,412,449 shares of Biomedicals' common stock
at a price of $5.42 per share which represented the closing market price of the
stock at that date less a discount of 15%.
On March 31, 1992, Biomedicals transferred, in a non-cash transaction,
$2,711,000 of debt owed to Skopbank of Finland to ICN. Biomedicals, in
exchange, issued 500,334 shares of Biomedicals' common stock at a price of
$5.42 per share which represented the closing market price of Biomedicals'
stock on that date less a discount of 15%. ICN became primarily liable for the
debt and Biomedicals became guarantor.
On March 31, 1992 Biomedicals exchanged, in a non-cash transaction,
$4,837,000 of debt owed to ICN for 892,703 shares of Biomedicals' common stock
issued to ICN at a price of $5.42 per share which represented the closing
market price of the stock at that date less a discount of 15%.
On December 31, 1991, Biomedicals issued, in a non-cash transaction,
3,363,298 shares of Biomedicals' common stock to ICN at a price of $6.25 which
represented the fair market value of Biomedicals' stock at that date in
exchange for debt owed ICN in the amount of $18,167,523.
On March 1, 1991, Biomedicals, pursuant to a fairness opinion, exchanged,
in a non-cash transaction, $3,833,000 of advances due to ICN into 538,000
shares of Biomedicals' common stock, issued at a price of $7.125 which
represented the fair market value of Biomedicals' stock at that date less a
discount of 22%.
On August 30, 1993, Biomedicals issued 300,000 shares of a new series
"A" of its non-convertible, non-voting, preferred stock valued pursuant to a
fairness opinion, at $30,000,000 to the Company. In exchange, the Company
delivered 4,983,606 shares of Biomedicals' common stock that ICN owned and
exchanged intercompany debt owed to ICN by Biomedicals in the amount of
$11,000,000.
43
46
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
In addition, on August 30, 1993, Biomedicals issued 390,000 shares of a
new series "B" of its non-convertible, non-voting, preferred stock valued
pursuant to a fairness opinion, at $32,000,000 to the Company. In exchange, ICN
delivered to Biomedicals 8,384,843, shares of Biomedicals' common stock that
ICN owned.
As a result of this exchange, Biomedicals had 9,033,623 common shares
issued and outstanding.
Subject to declaration by Biomedicals' Board of Directors, the new series
"A" preferred stock pays an annual dividend of $8, noncumulative, payable
quarterly and the new series "B" preferred stock pays an annual dividend of
$10, noncumulative, payable quarterly. Both series "A" and "B" preferred stock
become cumulative in respect to dividends upon certain events deemed to be a
change in control, as defined by the certificates of designation. The series
"B" preferred dividends are subject to the prior rights of the holders of the
series "A" preferred stock and any other preferred stock ranking prior to the
series "B" preferred.
The series "A" preferred stock is senior in ranking to the series "B"
preferred stock and the series "B" preferred stock is senior to Biomedicals'
common stock as to voluntary or involuntary liquidation, dissolution or winding
up of the affairs of Biomedicals, after payment or provision for payment of the
debts and other liabilities of Biomedicals. The holders of the series "A"
preferred shares are entitled to receive an amount in cash or in property,
including securities of another corporation, equal to $100 per share in
involuntary liquidation or $106 per share in voluntary liquidation prior to
August 31, 1994 and declining ratably per year to $100 per share after 1998,
plus dividends, in the event dividends have become cumulative. the holders of
the series "B" preferred shares are entitled to receive an amount in cash or in
property, including securities of another corporation equal to $100 per share
in voluntary or involuntary liquidation, plus dividends, in the event dividends
have become cumulative.
The series "A" and "B" preferred shares are redeemable, for cash or
property, including securities of another corporation, in whole or in part, at
the option of Biomedicals only, subject to approval by a vote of a majority of
the independent directors of Biomedicals. The series "A" preferred shares are
redeemable at $106 per share prior to August 31, 1994 and declining ratably per
year to $100 in 1998, plus dividends, in the event dividends have become
cumulative. The series "B" shares are redeemable at $100 per share, plus
dividends, in the event dividends have become cumulative.
No dividends were declared on the series "A" or series "B" preferred
stock during 1993.
Goodwill related to publicly traded subsidiaries at December 31, 1993
includes $3,975,000, net of amortization, related to purchases of Biomedicals'
stock.
Biomedicals has granted options for the purchase of 2,419,830 shares of
its common stock. At December 31, 1992, ICN's percentage ownership of
Biomedicals would have decreased from 69% to 44% assuming exercise of all
options and exchange of all the Bio Capital Holding Exchangeable Certificates
(see Note 7).
5. RELATED PARTY TRANSACTIONS
General
ICN controls Biomedicals and Viratek through stock ownership, voting
control and board representation and is affiliated with SPI. Certain officers
of ICN occupy similar positions with SPI,
44
47
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
Biomedicals and Viratek. ICN, SPI, Biomedicals and Viratek (collectively,
the "Affiliated Corporations") have engaged in, and will continue to engage
in, certain transactions with each other.
An Oversight Committee of the Boards of Directors of the Affiliated
Corporations reviews transactions between or among the Affiliated Corporations
to determine whether a conflict of interest exists among the Affiliated
Corporations with respect to a particular transaction and the manner in which
such conflict can be resolved. The Oversight Committee has advisory authority
only and makes recommendations to the Boards of Directors of each of the
Affiliated Corporations. The Oversight Committee consists of one
non-management director of each Affiliated Corporation and a non-voting
chairman. The significant related party transactions have been reviewed and
recommended for approval by the Oversight Committee, and approved by the
respective Boards of Directors.
Royalty agreements
Effective December 1, 1990, SPI and Viratek entered into a new royalty
agreement. Under this agreement, SPI continued to act as Viratek's exclusive
distributor of ribavirin and pays Viratek a royalty of 20% on sales worldwide
for a term of 10 years with an option by either party to extend it for an
additional 10 years. Royalties to Viratek under this agreement for 1993, 1992
and 1991 were $5,903,000, $5,448,000 and $4,263,000, respectively. Included in
royalties for 1993, 1992 and 1991 are royalties earned on foreign sales by SPI
totalling $2,107,000, $1,472,000 and $1,189,000, respectively.
During 1991, SPI purchased $235,000 of ribavirin from Viratek and also
transferred $2,943,000 of VirazoleR from Viratek at its cost.
Under an agreement between ICN and the employer of a director of Viratek,
SPI is required to pay a 2% royalty to the employer on all sales of VirazoleR
in aerosolized form. Such royalties for 1993, 1992 and 1991 were $422,000,
$430,000, and $313,000, respectively.
In July 1988, SPI began marketing products under license from ICN for the
treatment of myasthenia gravis, a disease characterized by muscle weakness and
atrophy. ICN charged SPI royalties at 9% of net sales. Effective September 1,
1990, SPI prepaid royalties to ICN in the amount of $9,590,000. There are no
future royalties due to ICN for these products.
Beginning December 1986, SPI began selling Brown Pharmaceuticals, Inc.
products under license from ICN. ICN charges SPI royalties at 8 1/2% of net
sales. During 1993, 1992 and 1991 SPI paid ICN $218,000, $65,000 and $93,000,
respectively, in royalties under this arrangement.
Cost allocations
The Affiliated Corporations occupy ICN's facility in Costa Mesa,
California. In each of 1993, 1992 and 1991, ICN charged facility costs of
$279,000, $310,000 and $30,000 to SPI, Biomedicals and Viratek, respectively.
The costs of common services such as maintenance, purchasing and personnel are
paid by SPI and allocated to ICN, Biomedicals and Viratek based on services
utilized. The total of such costs were $2,584,000 in 1993, $2,556,000 in 1992
and $2,617,000 in 1991 of which $1,733,000, $1,679,000 and $1,568,000 were
allocated to the Affiliated Corporations, respectively. Effective January 1,
1993, ICN reimburses Biomedicals for those allocations which are in excess of
the amounts determined by Biomedicals' management
45
48
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
using competitive data, as reviewed and recommended by the Oversight
Committee, that would have been incurred by the Company if it operated in a
facility suited solely to its requirements. During 1993, such reimbursements
totalled $772,000.
During 1991, Viratek began renting certain office equipment to ICN for use
at the Costa Mesa facility. Rent is being charged at the rate of $20,000 per
month through 1993, renewable annually. During 1993, 1992 and 1991 Viratek
charged ICN $240,000, $240,000 and $120,000, respectively.
It is management's belief that the methods used and amounts allocated for
facility costs and common services are reasonable based upon the usage by the
respective companies.
Investment policy
ICN and its affiliates have a policy covering intercompany advances and
interest rates, and the types of investments (marketable equity securities,
high-yield bonds, etc.) to be made by ICN and its affiliates. As a result of
this policy, excess cash is transferred to ICN. The affiliates are credited
with interest income based on prime (6% at December 31, 1993) less 1/2% and are
charged interest at the prime rate plus 1/2% on the amounts invested or
advanced.
SPI had outstanding borrowings from ICN in the amount of $18,313,000 and
$30,433,000 as of December 31, 1993 and 1992. During 1993, 1992 and 1991, ICN
charged (credited) SPI interest of $800,000, $1,195,000 and ($2,486,000),
respectively. During 1993 and 1992, SPI reclassified its Biomedicals
intercompany receivable of $2,333,000 and $3,631,000 and its Viratek
intercompany payable of $5,228,000 and $6,332,000, respectively, to SPI's ICN
intercompany account resulting in a net increase in SPI's liability to ICN of
$2,895,000 and $2,701,000, respectively.
During 1993 and 1992, Viratek reclassified $272,000 and $536,000 of
intercompany payables to Biomedicals to ICN and reclassified $5,228,000 and
$6,332,000 of intercompany receivables from SPI to ICN, which resulted in a
receivable of $15,528,000 and $9,325,000 due from ICN at December 31, 1993 and
1992, respectively. Viratek earned interest income of $714,000, $239,000 and
$271,000 from ICN on the average balance outstanding during 1993, 1992 and
1991.
During the year ended December 31, 1993 and 1992, Biomedicals reclassified
its SPI intercompany payable of $2,333,000 and $3,631,000, and its Viratek
intercompany receivables of $272,000 and $536,000 to ICN, resulting in
intercompany payables of $5,932,000 and $8,414,000 to ICN as of December 31,
1993 and 1992, respectively. ICN charged (credited) $420,000, $314,000 and
($218,000) to Biomedicals for interest on the average balance outstanding
during 1993, 1992 and 1991, respectively.
Other
Certain outside directors have provided legal and other consultation
services to ICN, which amounted to $148,000, $811,000 and $58,000 during 1993,
1992 and 1991, respectively.
During first quarter 1993, Biomedicals transferred its Dublin, Virginia,
facility to ICN in exchange for a reduction in the intercompany amounts due to
ICN of $586,000 representing the net book value at the date of the transfer.
46
49
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
Effective January 1, 1992, Viratek and Biomedicals entered into an
agreement whereby Biomedicals agreed to transfer rights, title and interest in
certain of its research and development assets to Viratek. Biomedicals shall
retain a right of first refusal to the marketing and distribution rights for
any product developed from the transferred assets and pay a royalty to Viratek.
Future royalties will be recognized as income when earned. During 1993 and
1992 there have been no sales of product subject to this royalty.
In 1991 SPI's 75%-owned subsidiary, Galenika, purchased equipment from
Viratek at its net book amount of $333,000.
In 1991, SPI's Mexican subsidiary purchased inventory from Biomedicals for
approximately $500,000, which was returned for credit in 1992.
During 1991, ICN transferred to SPI an idle manufacturing facility in
Brooksville, Mississippi at its net book amount of $3,114,000.
Since SPI assumed production and sales of Virazole, effective March 1,
1991, Viratek transferred to SPI all inventory at its net book amount of
$2,943,000.
During 1991, Biomedicals charged $250,000 to SPI representing costs
expended by Biomedicals for a product development program launched for SPI
which SPI determined not to pursue.
Effective May 1, 1991, Viratek and ICN transferred the rights to four
compounds, in various stages of development, to SPI for $1,350,000 and
$250,000, respectively, plus a royalty of 6.8% of future sales representing a
non-cash transaction. These amounts have been credited to additional capital.
Future royalties will be recognized as income when earned. During 1993 and
1992, there have been no sales of product subject to this royalty. Viratek has
reclassified the intercompany receivable from SPI to a receivable due from ICN
in the amount of $1,350,000.
See Note 4 "ICN Biomedicals, Inc." concerning Biomedicals' preferred stock
transaction.
See Note 9 "Commitments and Contingencies--Other" concerning transactions
with management.
6. ACQUISITIONS
Effective May 1, 1991, SPI formed a new joint company with Galenika
Pharmaceuticals headquartered in Belgrade, Yugoslavia. The joint company,
Galenika, is 75%-owned by SPI and 25%-owned by Galenika Holding ("Galenika
Holding"). Galenika, the leading pharmaceutical company in Yugoslavia,
produces, markets and distributes over 450 pharmaceutical, veterinary, dental
and other products in Yugoslavia, Eastern Europe and Russia.
In connection with the agreement, the Company contributed assets totaling
$58,301,000, consisting of $14,453,000 cash, an obligation to pay $13,550,000
and 1,200,000 unregistered shares of common stock of SPI issued to the
employees ("owners" in Socialist Yugoslavia) of Galenika Holding with a fair
value of $9,000,000. On December 31, 1991, the Company, on behalf of SPI,
contributed 1,468,000 shares of common stock of SPI to Galenika with a cost
basis of $11,555,000, the minority interest share of the excess of the fair
value of the common stock of the Company contributed by ICN and ICN's cost
basis or $6,743,000, and
47
50
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
acquisition costs of $3,000,000. Under the terms of the Galenika agreement,
SPI had an obligation to contribute, in part, $50,000,000 in cash and
1,200,000 shares of SPI stock or $12,000,000 in cash. However, the
agreement was subsequently changed in December 1991 whereby the Company, on
behalf of SPI, contributed shares of SPI stock in lieu of the $40,000,000
(after a cash payment of $10,000,000) and SPI issued 1,200,000 shares of SPI
stock in lieu of cash to comply with the original intent of the parties.
The Galenika transaction has been accounted for by the purchase method of
accounting, and accordingly, SPI's investment has been allocated, based on
SPI's ownership percentage, to the assets acquired and the liabilities assumed
based on the estimated fair values at the effective date of formation, May 1,
1991. Assuming that the acquisition of Galenika occurred at January 1, 1991,
the Company's 1991 pro forma revenues for the full year ended December 31,
1991, would have been $548,467,000 with net income of $19,825,000. The pro
forma information presented does not purport to be indicative of the results
that would have been obtained if the operations were combined during the year
presented and is not intended to be a projection of future results or trends.
7. DEBT
Long-term debt and obligations under capital leases consist of the
following:
1993 1992
---- ----
ICN:
12 7/8% Sinking Fund Debentures due July 15,
1998. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 70,697,000 $ 70,697,000
6% Dutch Guilder Subordinated Convertible Bonds
due 1990-1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,143,000 13,086,000
Swiss Franc Subordinated Bonds due 1988-2001
with effective interest rate of 7.4%. . . . . . . . . . . . . . . . . 15,559,000 17,214,000
12 1/2% Senior Subordinated Debentures due 1999. . . . . . . . . . . . 17,798,000 17,353,000
6 3/4% Subordinated Convertible Bonds due 2001 . . . . . . . . . . . . 449,000 8,273,000
3 1/4% Subordinated Double Convertible Bonds
due 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,236,000 5,290,000
Zero Coupon ECU Subordinated Bonds due 1987-
1996 with effective interest rate of 8.9% . . . . . . . . . . . . . . 3,408,000 4,745,000
Mortgages payable, with variable interest rates from
9 1/2% to 11 1/2% and due December 1990-2003. . . . . . . . . . . . . 13,353,000 13,839,000
Other long-term debt with variable interest rates. . . . . . . . . . . 6,551,000 8,241,000
------------ ------------
Total ICN. . . . . . . . . . . . . . . . . . . . . . . . . . . 139,194,000 158,738,000
------------ ------------
Subsidiaries of ICN:
Zero Coupon Guaranteed Bonds with an effective interest
rate of 13.5%, maturing in 2002 . . . . . . . . . . . . . . . . . . . 8,441,000 9,112,000
Other long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 3,505,000 4,660,000
------------ ------------
Total subsidiaries of ICN. . . . . . . . . . . . . . . . . . . 11,946,000 13,772,000
------------ ------------
Total long-term debt and obligations under
capital leases. . . . . . . . . . . . . . . . . . . . . . . . . . . . 151,140,000 172,510,000
Less: Current maturities . . . . . . . . . . . . . . . . . . . . . . . (12,093,000) (12,499,000)
------------ ------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $139,047,000 $160,011,000
============ ============
48
51
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
Other long-term debt includes notes payable, mortgages, margin
borrowings and the present value of capital lease obligations due in various
installments through 2002.
On March 25, 1987, the Company completed an underwritten public offering
in Switzerland of SFr. 60,000,000 principal amount (approximately $38,961,000)
of 3 1/4% Subordinated Double Convertible Bonds due 1997 "Double Convertible
Bonds". These bonds are convertible at the option of the holder into one of
the following: (1) entirely into 1,500,000 shares of Common Stock of ICN at a
conversion price of $26.14 per share (at a fixed exchange rate of SFr.1.53 per
$1.00); or (2) entirely into 15,000 shares of common stock of Ciba-Geigy Ltd.
at a conversion price of SFr. 4,000 per share; or (3) a combination of 750,000
shares of Common Stock of ICN and 7,500 shares of common stock of Ciba-Geigy
Ltd. at conversion prices of $26.14 and SFr. 4,000 per share, respectively,
subject to adjustment for dilutive issues. In connection with this offering,
the Company placed in escrow 15,000 shares of Ciba-Geigy Ltd. common stock, of
which 1,928 shares remain at December 31, 1993 which are reflected in the
Consolidated Balance Sheet as investment in other equity securities.
Conversions during 1992 and 1991 were not material and there were no
conversions during 1993. Fair value of these bonds was approximately
$6,021,000 at December 31, 1993.
In 1987, Bio Capital Holding ("Bio Capital"), a trust established by ICN
and Biomedicals, completed a public offering in Switzerland of Swiss Francs
(SFr.) 70,000,000 principal amount of 5 1/2% Swiss Franc Exchangeable
Certificates ("Old Certificates"). At the option of the certificate holder,
the Old Certificates are exchangeable into shares of Biomedicals common stock.
Net proceeds were used by Bio Capital to purchase SFr. 70,000,000 face amount
of zero coupon Swiss Franc Debt Notes due 2002 of the Kingdom of Denmark (the
"Danish Bonds") for SFr. 33,772,000 and 15 series of zero coupon Swiss Franc
Guaranteed Bonds of the Company (the "Zero Coupon Guaranteed Bonds") for SFr.
32,440,000, which are guaranteed by ICN. Each series of the Zero Coupon
Guaranteed Bonds are in an aggregate principal amount of SFr. 3,850,000
maturing in February of each year through 2002. ICN and Biomedicals have no
obligation with respect to the payment of the principal amount of the Old
Certificates since they will be paid upon maturity by the Danish bonds.
During 1990, Biomedicals offered to exchange, to all certificate holders,
the Old Certificates for newly issued certificates ("New Certificates"), the
terms of which remain the same except that 334 shares per SFr. 5,000 principal
certificate can be exchanged at $10.02 using a fixed exchange rate of SFr. 1.49
to U.S. $1.00. Substantially all of the outstanding Old Certificates were
exchanged for New Certificates (together referred to as "Certificates"). This
exchange was accounted for as an extinguishment of debt and the effect on net
income was not material.
During 1992, Biomedicals repurchased SFr. 5,640,000 of Bio Capital
Certificates, representing long-term debt of $1,859,000. During 1991, SFr.
1,245,000 ($918,000) principal amount of Certificates were exchanged into
83,166 shares of Biomedicals' common stock. No repurchases were made in 1993.
As of December 31, 1993, the consolidated financial statements include
outstanding debt of SFr. 12,534,000 ($8,441,000) which represents the present
value of the Company's obligation to pay the Zero Coupon Guaranteed Bonds.
When Certificates are exchanged into common stock, Biomedicals' obligation to
pay the Zero Coupon Guaranteed Bonds is reduced and the Danish Bonds are
released by Bio Capital to Biomedicals, both on a pro rata basis. As of
December 31, 1993, SFr. 39,615,000 ($26,677,000) principal of Certificates were
outstanding which, if exchanged for common stock, would result in the issuance
of 2,608,241 shares of Biomedicals' common stock, a reduction of long-term debt
of SFr. 11,330,000 ($7,630,000), a reduction of SFr. 1,204,000 ($811,000) of
current maturities of long-term debt, and an increase in marketable
49
52
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
securities of SFr. 20,204,000 ($13,605,000) from the release of Bio
Capital of the Danish Bonds to Biomedicals. Fair value of these bonds was
approximately $7,850,000 at December 31, 1993.
In October 1986, the Company completed an underwritten public offering of
$75,000,000 principal amount of 6 3/4% Subordinated Convertible Bonds Due 2001
(the "6 3/4% Bonds") convertible into 3,626,692 shares of ICN Common Stock at a
conversion price of $20.68 per share, subject to adjustment for dilutive
issues. During 1993, $7,824,000 principal amount of the bonds were redeemed at
the bondholder's option. Fair value of these bonds was approximately $442,000
at December 31, 1993.
In October 1986, Pharma Capital Holdings ("Pharma Capital"), a trust
established by the Company, completed an underwritten public offering in Europe
of ECU 40,000,000 principal amount of 7 1/4% Exchangeable Certificates Due 1996
(the "Pharma Certificates") of which ECU 16,195,000 remain outstanding at
December 31, 1993. The Pharma Certificates are exchangeable into 1,936,000
shares of Common Stock of ICN at an initial exchange price of $21.1364 per
share, at a fixed exchange rate of ECU .9775 per $1.00. The net proceeds of
approximately ECU 19,400,000 were used by Pharma Capital to purchase nine
series of Zero Coupon ECU Subordinated Bonds of ICN (consisting of one series,
payable in two installments, the first on May 30, 1987 in the amount of ECU
1,756,111 and the second on May 30, 1988 in the amount of ECU 2,900,000, and
eight series each in the aggregate principal amount of ECU 2,900,000 maturing
on May 30 in each of the years 1989 to 1996) (the "ICN-ECU Bonds") and ECU
40,000,000 aggregate principal amount of ECU 200,000,000 Zero Coupon Guaranteed
Bonds Due May 30, 1996, Series 119, of The Mortgage Bank and Financial Agency
of the Kingdom of Denmark (unconditionally guaranteed by the Kingdom of
Denmark). The Company has no obligation with respect to the payment of the
face amount of the Pharma Certificates since these are to be paid upon maturity
by the Kingdom of Denmark Zero Coupon Guaranteed Bonds (except for payment of
certain additional amounts in the event of the imposition of U.S. withholding
taxes on either the Pharma Certificates or ICN-ECU Bonds and funds required for
redemption of the Pharma Certificates in the event the Company exercises its
optional right to redeem). Fair value of these bonds was approximately
$3,204,000 at December 31, 1993.
In October 1986, Xr Capital Holding ("Xr Capital"), a trust established by
the Company, completed an underwritten public offering in Switzerland of Swiss
Francs 100,000,000 principal amount of 5 5/8% Swiss Franc Exchangeable
Certificates (the "Xr Certificates") of which SFr 66,510,000 remain outstanding
at December 31, 1993. The Xr Certificates are exchangeable through 2001 for
1,250,000 shares of Common Stock of ICN and 860,000 shares of Common Stock of
SPI owned by ICN at initial exchange prices of $24.10 and $35.02 per share,
respectively, at a fixed exchange rate of SFr. 1.66 per $1.00. The net
proceeds of the offering were used by Xr Capital to purchase from the Company
14 series of Swiss Franc Subordinated Bonds due 1988-2001 (the "ICN-Swiss Franc
Xr Bonds") for approximately $27,944,000 and SFr. 45,700,000 principal amount
of cumulative coupon 5.4 percent Italian Electrical Agency Bonds due 2001 for
approximately $27,202,000. The Company has no obligation with respect to the
payment of the face amount of the Xr Certificates since these are to be paid
upon maturity by the Italian Bonds (except for payment of certain additional
amounts in the event of the imposition of U.S. withholding taxes on either the
Xr Certificates or ICN-Swiss Franc XR Bonds and funds required for redemption
of the Xr Certificates in the event the Company exercises its optional right to
redeem). Fair value of these bonds was approximately $14,314,000 at December
31, 1993.
In September 1986, the Company completed an underwritten public offering
in the Netherlands of Dutch Guilders 75,000,000 principal amount (approximately
$32,751,000 at date of issuance) of 6%
50
53
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
Subordinated Convertible Bonds due 1990-1994 (the "Dutch Guilder Bonds").
These bonds are convertible into 1,259,657 shares of ICN Common Stock
at a conversion price of $26 per share at a fixed exchange rate of Dfl. 2.29
per $1.00, subject to adjustment for dilutive issues. Fair value of these
bonds was approximately $6,032,000 at December 31, 1993.
The Company has the optional right to redeem the 6 3/4% Bonds, ICN-ECU
Bonds, ICN-Swiss Franc Xr Bonds, Bio Certificates, Double Convertible Bonds,
and the Dutch Guilder Bonds in the event that the market price of ICN Common
Stock meets certain conditions.
In July 1986, the Company sold $115,000,000 principal amount of 12 7/8%
Sinking Fund Debentures (the "12 7/8% Debentures"), due July 15, 1998, in an
underwritten public offering. The 12 7/8% Debentures are redeemable, in whole
or in part, at the option of the Company, at any time on or after July 15,
1991, at specified redemption prices, plus accrued interest. Mandatory annual
sinking fund payments, commencing on July 15, 1994, are calculated to retire
80% of the issue prior to maturity. The indenture imposes limitations on,
among other things, (i) the issuance or assumption by the Company or its
subsidiaries of additional debt which is senior to the 12 7/8% Debentures, (ii)
dividends and distributions on, or repurchases and redemptions of, Common Stock
of the Company and (iii) the Company becoming an investment company. The fair
value of these debentures was approximately $72,641,000 at December 31, 1993.
In May 1984, the Company completed a public offering of $30,000,000 of 12
1/2 percent Senior Subordinated Debentures (the "12 1/2% Debentures") due 1999.
The 12 1/2% Debentures provide for annual sinking fund payments of $3,215,000
commencing May 15, 1992. The 12 1/2% Debentures are redeemable at any time
after May 15, 1989 at the Company's option and are subordinated to all senior
indebtedness. The net proceeds from the 12 1/2% Debentures were $21,390,000.
The original issue discount and costs associated with the offering are being
amortized over the life of the 12 1/2% Debentures. This results in an
effective interest rate to the Company (exclusive of sinking fund requirements)
of 16.75%. The indenture agreement for the 12 1/2% Debentures is less
restrictive than the indenture relating to the 12 7/8% Debentures. The fair
value of these debentures was approximately $18,619,000 at December 31, 1993.
Annual aggregate maturities of long-term debt, including obligations under
capitalized leases subsequent to December 31, 1993 are as follows:
1994 . . . . . . . . . . . . $ 12,093,000
1995 . . . . . . . . . . . . 11,027,000
1996 . . . . . . . . . . . . 36,427,000
1997 . . . . . . . . . . . . 36,109,000
1998 . . . . . . . . . . . . 30,733,000
Thereafter. . . . . . . . . . 24,751,000
-----------
Total. . . . . . . . . . $151,140,000
===========
At December 31, 1993 and 1992, the Company had $7,600,000 and $16,584,000,
respectively, of margin borrowings and notes payable. At December 31, 1993,
1,107,898 and 402,000 shares of ICN-owned shares of SPI and Viratek,
respectively, collateralized these borrowings. The Company may use as
collateral or sell additional shares of its common stock or common stock of its
subsidiaries or equity investment in order to meet its short term cash
requirements or other corporate goals.
51
54
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
The fair value of the Company's debt is estimated based on quoted market
prices for the same or similar issues or on the current rates offered to the
Company for debt of the same remaining maturities. The carrying amount of all
short-term and variable interest rate borrowings approximates fair value.
8. INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). The
new statement supersedes the Company's previous policy of accounting for income
taxes under Statement of Financial Accounting Standards No. 96 "Accounting for
Income Taxes " (SFAS 96). Both statements require the use of the liability
method of accounting for income taxes, but the recognition of deferred tax
assets was limited under SFAS 96. Under SFAS 109, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities, using enacted tax rates in effect for
the year in which the differences are expected to reverse. The change in the
method of accounting for income taxes from SFAS 96 to SFAS 109 resulted in no
cumulative effect adjustment.
Income (loss) before provision for income taxes, minority interests and
extraordinary income for 1993, 1992 and 1991, consists of the following:
1993 1992 1991
---- ---- ----
Domestic . . . . . . . . . . . . . . . . . . . . . $(10,964,000) $(51,269,000) $(19,342,000)
Foreign. . . . . . . . . . . . . . . . . . . . . . (1,930,000) 10,992,000 50,806,000
----------- ----------- -----------
$(12,894,000) $(40,277,000) $ 31,464,000
=========== =========== ===========
The income tax (benefit) provision consists of the following:
1993 1992 1991
---- ---- ----
Current:
Federal. . . . . . . . . . . . . . . . . . . . . $ (162,000) $ 5,928,000 $ 3,452,000
State. . . . . . . . . . . . . . . . . . . . . . -- 212,000 360,000
Foreign. . . . . . . . . . . . . . . . . . . . . (312,000) 1,801,000 3,072,000
---------- ----------- -----------
. . . . . . . . . . . . . . . . . . . . . $ (474,000) 7,941,000 6,884,000
========== =========== ===========
Deferred:
Federal. . . . . . . . . . . . . . . . . . . . . -- 841,000 103,000
State. . . . . . . . . . . . . . . . . . . . . . -- -- (39,000)
Foreign. . . . . . . . . . . . . . . . . . . . . -- 1,185,000 (374,000)
---------- ----------- ----------
$ -- 2,026,000 (310,000)
---------- ----------- ----------
$ (474,000) $ 9,967,000 $ 6,574,000
========== =========== ==========
Of the 1992 current federal tax provision of $5,928,000, $956,000 relates
to the tax benefit from the exercise of stock options. Such amount was
credited to additional capital.
52
55
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
The primary components of temporary differences which give rise to the
Company's net deferred taxes are as follows:
January 1, 1993 December 31, 1993
--------------- -----------------
Deferred tax assets:
Inventory and other reserves $ 6,386 $ 5,378
Amortization differences 1,986 246
Compensation not currently deductible 1,029 873
Unrealized losses 2,151 2,214
Other deferred items 1,750 1,750
Domestic NOL 40,012 50,983
Foreign NOL 12,635 13,311
Valuation reserve (63,985) (72,733)
-------- --------
Total deferred tax asset 1,964 2,022
-------- --------
Deferred tax liabilities:
Depreciation (tax over book) (1,964) (2,022)
-------- --------
Total deferred tax liability (1,964) (2,022)
-------- --------
Net deferred tax liability $ 0 $ 0
======== ========
53
56
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
A reconciliation of the federal statutory income tax rate to the Company's
effective income tax rate is as follows:
1993 1992 1991
---- ---- ----
Statutory rate . . . . . . . . . . . . . . . . . . . . . . (35%) (34%) 34%
Operating losses--no tax benefit realized. . . . . . . . . 30 15 25
Write-off and amortization of goodwill . . . . . . . . . . 5 47 10
Provision to return adjustment . . . . . . . . . . . . . . (1) -- --
Reduction in foreign tax liabilities . . . . . . . . . . . (2) -- --
Utilization of domestic NOL. . . . . . . . . . . . . . . . -- (2) (28)
Utilization of foreign NOL . . . . . . . . . . . . . . . . -- (3) (2)
Foreign source income taxed at different effective
rates, net. . . . . . . . . . . . . . . . . . . . . . . . -- 12 (45)
Transactions involving subsidiaries stock. . . . . . . . . -- (12) 23
Alternative minimum tax. . . . . . . . . . . . . . . . . . -- 1 1
Other, net . . . . . . . . . . . . . . . . . . . . . . . . (1) 1 4
----- ----- ----
(4%) 25% 22%
===== ===== ====
The Company files its Federal income tax return on a stand-alone basis.
In years prior to 1993, tax sharing agreements allocated taxes for periods when
a subsidiary was included in the Company's consolidated tax return. The
following table indicates inclusion of subsidiaries in the Company's
consolidated tax return.
1992 1991
---- ----
SPI -- Until 8-13-91
Biomedicals -- --
Viratek Until 2-1-92 Entire year
The Company conducts business in a number of different tax jurisdictions.
Accordingly, losses sustained in one jurisdiction generally cannot be applied
to reduce taxable income in another jurisdiction. The income of certain
foreign subsidiaries is not subject to U.S. income taxes, except when such
income is paid to the U.S. parent company or one of its domestic subsidiaries.
No U.S. taxes have been provided on the Company's foreign subsidiaries since
management intends to reinvest those amounts in foreign operations. Included
in consolidated retained earnings (deficit) at December 31, 1993 is
approximately $1,820,000 of accumulated earnings of foreign operations that
would be subject to U.S. income taxes if and when repatriated.
The Company has domestic net operating loss carryforwards ("NOL")
of approximately $190,000,000 (of which $17,800,000 will be credited to
additional capital when utilized) at December 31, 1993, expiring at various
dates from 1994 through the year 2008.
Included in the $190,000,000 NOL is approximately $47,500,000 of NOL
attributable to Viratek. Of the $47,500,000 NOL attributable to Viratek,
$10,900,000 will be credited to capital when utilized. Viratek's
54
57
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
NOL can only be utilized by the Company to offset Viratek taxable income
generated on a separate company basis.
Also included in the $190,000,000 NOL is approximately $39,000,000 of
domestic NOL and $38,000,000 of foreign NOL attributable to Biomedicals of
which $458,000 will be credited to additional capital when utilized.
Biomedicals' NOL's are restricted to utilization by that company. In
connection with the acquisition of Flow, Biomedicals acquired Flow's domestic
net operating loss carryforwards of $9,771,000. Biomedicals has agreed to pay
Flow the first $500,000 of any benefits realized. In the event this amount is
not realized by November 1994, it will become due and payable to Flow including
interest at 10%. Tax benefits realized in excess of $500,000 will be shared
equally with Flow.
The Company is currently under examination by the U.S. Internal Revenue
Service ("IRS") for the tax years ended November 30, 1989 and 1988. While the
proposed adjustments, if upheld, would not result in a significant additional
tax liability, they would result in significant reductions in the NOL
carryforwards available to the Company in the future.
9. COMMITMENTS AND CONTINGENCIES
Operating and capital leases
At December 31, 1993, the Company and its consolidated subsidiaries were
committed under noncancellable operating and capital leases for minimum
aggregate lease payments as follows:
OPERATING CAPITAL
LEASES LEASES
--------- -------
1994 . . . . . . . . . . . . . . $ 849,000 $155,000
1995 . . . . . . . . . . . . . . 799,000 88,000
1996 . . . . . . . . . . . . . . 625,000 88,000
1997 . . . . . . . . . . . . . . 507,000 89,000
1998 . . . . . . . . . . . . . . 534,000 --
Thereafter . . . . . . . . . . . 4,782,000 --
--------- -------
$8,096,000 420,000
---------
Less amounts representing interest. . 62,000
-------
Present value of net minimum lease
payments . . . . . . . . . . . . . . 358,000
Less current maturities. . . . . . . . 129,000
-------
$229,000
=======
Rental expense on operating leases was $870,000 in 1993, $2,934,000
(including SPI) in 1992 and $2,107,000 (including SPI) in 1991.
55
58
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
Post approval studies
By letter dated December 31, 1985, the FDA advised Viratek that the FDA
had approved Viratek's NDA for the hospital use of aerosolized ribavirin for
the treatment of RSV in infants. As a condition of the approval, Viratek
agreed to conduct certain additional studies. The future costs of such studies
are not expected to be significant.
Litigation
The Company is a defendant in certain consolidated class actions
pending in the United States District Court for the Southern District of New
York entitled In re Paine Webber Securities Litigation (Case No. 86 Civ. 6776
(VLB); In re ICN/Viratek Securities Litigation (Case No. 87 Civ. 4296 (VLB)).
The plaintiffs represent alleged classes of persons who purchased ICN, Viratek
or SPI common stock during the period January 7, 1986 to and including April
15, 1987. In their memorandum of law, dated February 4, 1994, the ICN
Defendants argue that class certification may only be granted for purchasers of
ICN common stock for the period August 12, 1986 through February 20, 1987 and
for purchasers of Viratek common stock for the period December 9, 1986 through
February 20, 1987. The ICN Defendants assert that no class should be certified
for purchasers of the common stock of SPI for any period. The plaintiffs
allege that during such period the defendants made, or aided and abetted other
defendants in making, misrepresentations of material fact and omitted to state
material facts concerning the business, financial condition and future
prospects of ICN, Viratek and SPI in certain public announcements, Paine
Webber, Inc. research reports and filings with the Commission. The alleged
misstatements and omissions primarily concern developments regarding VirazoleR,
including the efficacy and safety of the drug and the market for the drug. The
plaintiffs allege that such misrepresentations and omissions violate Section
10(b) of the Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and
constitute common law fraud and misrepresentation. The plaintiffs seek an
unspecified amount of monetary damages, together with interest thereon, and
their costs and expenses incurred in the action, including reasonable
attorneys' and experts' fees. The ICN defendants moved to dismiss the
consolidated complaint in March 1988, for failure to state a claim upon which
relief may be granted and for failure to plead the allegations of fraud and
misrepresentation with sufficient particularity. On September 18, 1992, the
Court denied the ICN defendants' motion to dismiss and for summary judgment.
The ICN defendants filed their answer on February 17, 1993. On October 20,
1993, plaintiffs informed the Court that they had reached an agreement to
settle with co-defendant Paine Webber, Inc. and that they would submit a
proposed settlement stipulation to the Court. Expert discovery, which
commenced in September 1993, is expected to conclude by the end of April 1994.
Plaintiffs' damages expert, utilizing assumptions and methodologies that the
ICN Defendants' damages experts find to be inappropriate under the
circumstances, has testified that, assuming that classes were certified for
purchasers of ICN, Viratek and SPI common stock for the entire class periods
alleged by plaintiffs, January 7, 1986 through April 15, 1987, and further
assuming that all of the plaintiffs' allegations were proven, potential damages
against ICN, Viratek and SPI would, in the aggregate, amount to $315,000,000.
The ICN Defendants' four damages experts have testified that damages are zero.
Management believes, having extensively reviewed the issues in the above
referenced matters, that there are strong defenses and that the Company intends
to defend the litigation vigorously. While the ultimate outcome of these
lawsuits cannot be predicted with certainty, and an unfavorable outcome could
have an adverse effect on the Company, at this time management does not expect
that these matters will have a material adverse effect on the financial
position, result of operations or liquidity of the Company. The attorney's
fees and other costs of the litigation are allocated equally between ICN and
Viratek.
56
59
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
In August 1992, an action was filed in United States District Court for
the Southern District of New York, entitled Rossi v. ICN Pharmaceuticals, Inc.
(Case No. 92 Cir. 4819 (CL6)). The plaintiffs, citing theories of product
liability, negligence and strict liability in tort, allege that birth defects
in an infant were caused by the mother's exposure to ribavirin during
pregnancy. The plaintiff's counsel has agreed to place the case on the courts
"suspense calendar" pending completion of ICN's investigation of the underlying
facts. Based on such investigation, the case was dismissed with prejudice
pursuant to stipulation by the parties in December 1993. Pursuant to a license
agreement, SPI has indemnified Viratek and ICN for lawsuits involving the use
of VirazoleR.
On September 27, 1993, ICN and Biomedicals filed a complaint in the
California State Superior Court for Orange County, California, against GRC
International Inc., alleging fraud, negligent misrepresentation in the sale of
securities in California and violations of state and federal securities laws.
The precise amount of damages is unknown at this time. The lawsuit arises out
of the acquisition of all of the issued and outstanding shares of Flow
Laboratories, Inc. ("Flow") and Flow Laboratories B.V. by Biomedicals in
November 1989 from GRC International Inc., (formerly known as Flow General
Inc.). Defendant GRC's motion to compel arbitration was granted as to the
Biomedicals claims. The action is stayed until April 7, 1994, as to ICN's
causes of action.
On April 5, 1993, ICN and Viratek filed suit against Rafi Khan ("Khan")
in the United States District Court for the Southern District of New York. The
complaint alleges, inter alia, that Khan violated numerous provisions of the
-----------
securities laws and breached his fiduciary duty to ICN and Viratek by
attempting to effectuate a change in control of ICN while acting as an agent
and fiduciary of ICN and Viratek. As relief, ICN and Viratek, among other
things, sought an injunction enjoining Khan from effectuating a change in
control of ICN and compensatory and punitive damages in the amount of
$25,000,000. Khan filed a counterclaim on April 12, 1993, naming the then ICN
directors and ICN, as a nominal defendant sued only in a derivative capacity.
The counterclaim contains causes of action for slander, interference with
economic relations, and a shareholders' derivative action for breach of
fiduciary duties. Khan seeks compensatory damages for interest in an
unspecified amount, and exemplary damages of $29,000,000. On December 22,
1993, Khan filed a notice of appeal from a prior injunction granted by the
court, to the Court of Appeals for the Second Circuit. On March 13, 1994, that
appeal was dismissed on the grounds that Khan had defaulted for failure to
comply with the Court's scheduling order. Management believes that Khan's
counterclaim is without merit and the Company intends to vigorously defend
this matter.
The Company is a party to a number of other pending or threatened lawsuits
arising out of, or incident to, its ordinary course of business. In the
opinion of management, these various other pending lawsuits will not have a
material adverse effect on the consolidated financial position or operations of
the Company.
Purchase Commitment
Biomedicals has a purchase commitment with a major supplier for which the
remaining purchase of inventory under agreement which will be due June 1994 in
the amount of approximately $1,727,000 (Finnish Markka 10,000,000).
Biomedicals is also a guarantor on a note payable to the same supplier for
which ICN is primarily liable. On June 30, 1993, ICN filed a claim in
arbitration alleging breach of agreement entered into with such supplier and
withheld final payment due on that date of approximately $1,295,000 (Finnish
Markka 7,500,000). In addition, ICN is seeking declaration and award that
Biomedicals is not obligated to honor the aforementioned purchase commitment or
installments on the note. Arbitration is set for October 4, 1994.
Acquisition Commitments
Under the terms of the Flow purchase agreement, Biomedicals issued 100,000
shares of common stock to the seller, which shares have a guaranteed value of
$20 per share on November 8, 1994. If the fair value, as defined, of
Biomedicals' common stock is less than $20 per share on that date, Biomedicals
must pay the difference in cash. Biomedicals may redeem such shares for the
$20 guaranteed value prior to November 8, 1994. At December 31, 1993,
Biomedicals would have paid $1,575,000 to honor the guarantee.
57
60
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
Product Liability Insurance
During 1985, after reviewing costs, availability and related factors,
management decided not to continue to maintain product liability insurance.
While to date no material adverse claim for personal injury resulting from
allegedly defective products, including ribavirin, has been successfully
maintained against the Company, a substantial claim, if successful, could have
a material adverse effect on the Company.
Other
Milan Panic, the Company's Chairman of the Board, President and Chief
Executive Officer, is employed under a contract expiring November 30, 1994 that
provides for, among other things, certain retirement benefits. Mr. Panic, at
his option, may provide consulting services upon his retirement for $120,000
per year for life, subject to annual cost-of-living adjustments from the base
year of 1967 currently estimated to be in excess of $520,000 per year.
The consulting fee shall not at any time exceed the annual compensation as
adjusted, paid to Mr. Panic. Upon Mr. Panic's retirement, the consulting fee
shall not be subject to further cost of living adjustments.
The Board of Directors of the Company adopted Employment Agreements during
1993 which contain "change in control" benefits for six key senior executive
officers of the Company and its subsidiaries. Upon a "change in control" of
the Company or the respective subsidiary as defined in the Contract, the
employee shall receive severance benefits equal to three times salary and other
benefits. The executives include Mr. Jerney, Mr. Giordani, Mr. MacDonald and
Mr. Watt, officers of the Company, Mr. Phillips and Mr. Sholl, officers of SPI.
On April 1, 1992, the Board of Directors of the Company voted to grant to
Mr. Panic, a bonus of 200,000 shares of the common stock of SPI in
consideration of his extraordinary efforts in negotiating and closing the
Galenika transaction, which was paid in 1992.
In July 1992, Milan Panic, Chairman of the Board, President and Chief
Executive Officer of the Company, with the approval of the Company's Board of
Directors, became Prime Minister of Yugoslavia and was granted a paid leave of
absence from all duties to the Company while retaining his title as Chairman of
the Board. Mr. Panic and the Company entered into a Leave of Absence and
Reemployment Agreement which contained mutual obligations, requiring, among
other things, that the Company reemploy Mr. Panic and that Mr. Panic return to
his previous positions with the Company. Mr. Panic was succeeded as Prime
Minister on March 4, 1993, and pursuant to the Leave of Absence and
Reemployment Agreement, returned to his duties at the Company. In addition to
the salaries of Mr. Panic and certain Company employees assisting him during
his leave of absence, the Company has incurred certain other expenses of which
the net amount outstanding totalled $103,000 at December 31, 1992 in connection
with Mr. Panic's transition to and return from his leave of absence. Mr. Panic
reimbursed the Company for expenses paid by the Company in 1992, subject to a
review by an independent outside party and the Audit Committee of the Board.
Amounts incurred by the Company during the first quarter of 1993 for
approximately $362,000 remain unpaid at December 31, 1993. In addition, Mr.
Panic reimbursed certain withholding taxes due as of December 31, 1992,
previously advanced by the Company, in connection with the exercise of stock
options, in the amount of $1,351,000. Mr. Panic paid these amounts, during
1993, in the form of cash in the amount of $678,000 and common stock of
Viratek, Inc. in the amount of $776,000 valued at fair market value.
58
61
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
Benefit plans
The Company adopted a 401(k) plan in 1988 that provides all U.S. employees
with the opportunity to defer a portion of their compensation for payout at a
subsequent date. The Company makes a contribution equal to one half of the
employee's contribution up to a maximum of approximately $4,000 per year. The
employer and employee contributions are given to a trustee on a monthly basis
and invested by the trustee in fixed or variable interest-bearing investments
or a common stock fund. The Company has made such matching contributions for
1993, 1992, 1991 of $447,000, $397,000 and $398,000, respectively.
Biomedical's United Kingdom subsidiary has a defined benefit retirement
plan which covers all eligible U.K. employees. The plan is actuarily reviewed
approximately every three years. Annual contributions are based on total
pensionable salaries. It is estimated that the plan's assets exceeded the
actuarial computed value of vested benefits as of December 31, 1993 and 1992.
The total expense under this plan for 1993, 1992 and 1991 was
approximately $248,000, $32,000 and $440,000, respectively.
The Company also has deferred compensation agreements with certain officers
and certain key employees, with benefits commencing at death or retirement. As
of December 31, 1993, the present value of the deferred compensation benefits
to be paid has been accrued in the amount of $2,481,000. Interest at 11.75% as
of December 31, 1993, accrues until all payments are made. No new
contributions are being made, however, interest continues to accrue on the
present value of the benefits expected to be paid. The expense for 1993, 1992
and 1991 was $217,000, $309,000 and $453,000, respectively.
10. COMMON STOCK
Under the Company's 1981 Employee Stock Option Plan, 700,000 shares of
common stock have been reserved for granting to key employees, officers and
directors of the Company. The exercise price of these options may not be less
than the fair market value of the stock at date of grant and may not have a
term exceeding ten years. At December 31, 1993, options under the 1981
Employee Incentive Stock Option Plan for 35,878 shares were outstanding and
exercisable (at prices ranging from $3.00 to $9.25). The number of shares
exercised were: 1993 - 30,256; 1992 - 2,250; 1991 - 5,000, at average prices
of $4.655, $3.00 and $6.375, respectively.
At December 31, 1993, options under the 1981 non-qualified stock option
agreements with key employees and officers of the Company for 215,863 shares
were outstanding (at prices ranging from $3.00 to $5.75) with 126,863 shares
exercisable. The number of shares exercised were: 1993 - 153,808; 1992 -
181,855; 1991 - 348,007, at average prices of $4.736, $3.55 and $3.00,
respectively.
During 1992, the stockholders of the Company approved the 1992
Non-Qualified Stock Option Plan ("1992 Option Plan") and the 1992 Employee
Incentive Stock Option Plan ("1992 Incentive Plan"), reserving 500,000 shares
per plan of the Company's common stock for issuance to employees and directors
of the Company. The Company has granted options for shares of its common stock
under both plans. Options under both plans are exercisable over a period to be
determined by the Compensation Committee, which shall not exceed ten years from
the date of grant and will expire at the end of the option period. At December
31, 1993, under the 1992 Option Plan, options of 85,000 were outstanding (at
prices ranging from $6.375 to $22.875), 11,000 shares were exercisable and none
have been exercised. At December 31, 1993, under the 1992
59
62
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
Incentive Plan, options of 255,000 were outstanding (at prices ranging
from $6.375 to $9.50), 26,250 shares were exercisable and none have been
exercised.
In addition, the Company entered into non-qualified stock option
agreements with Mr. Panic pursuant to which he could purchase 932,000 shares of
common stock of the Company at $3.00 per share of which 832,000 shares were
exercised in 1993. There were no shares exercised in 1992 and 100,000 shares
were exercised in 1991. As of December 31, 1993, no shares were outstanding.
During 1993 and 1992, the Company sold, under various agreements,
3,000,000 and 4,198,000 shares of its common stock to a foreign bank for
$21,861,000 and $30,608,000, respectively, which is net of transaction fees and
commissions.
11. DETAIL OF CERTAIN ACCOUNTS
1993 1992
---- ----
Inventories, net:
Raw materials and supplies . . . . . . . . . . . . . . $ 3,422,000 $ 3,898,000
Work-in-process. . . . . . . . . . . . . . . . . . . . 610,000 2,439,000
Finished goods . . . . . . . . . . . . . . . . . . . . 23,048,000 22,692,000
----------- -----------
$ 27,080,000 $ 29,029,000
Allowance for inventory obsolescence . . . . . . . . . (11,479,000) (15,530,000)
----------- -----------
$ 15,601,000 $ 13,499,000
=========== ===========
Property, plant and equipment, net:
Land . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,697,000 $ 11,852,000
Buildings. . . . . . . . . . . . . . . . . . . . . . . 18,096,000 16,223,000
Machinery and equipment. . . . . . . . . . . . . . . . 21,919,000 21,214,000
Furniture and fixtures . . . . . . . . . . . . . . . . 3,464,000 3,972,000
Leasehold improvements . . . . . . . . . . . . . . . . 2,709,000 2,440,000
Construction in progress . . . . . . . . . . . . . . . 78,000 78,000
----------- -----------
59,963,000 55,779,000
Accumulated depreciation . . . . . . . . . . . . . . . (23,720,000) (21,666,000)
----------- -----------
$ 36,243,000 $ 34,113,000
=========== ===========
Other assets and deferred charges:
Deferred loan costs. . . . . . . . . . . . . . . . . . $ 4,546,000 $ 6,021,000
Patents, trademarks and clinical trials,
net of amortization. . . . . . . . . . . . . . . . . 2,102,000 3,178,000
Other. . . . . . . . . . . . . . . . . . . . . . . . . 946,000 408,000
----------- -----------
$ 7,594,000 $ 9,607,000
=========== ===========
Accrued liabilities:
Payroll and related items. . . . . . . . . . . . . . . $ 2,305,000 $ 1,939,000
Accrued interest . . . . . . . . . . . . . . . . . . . 6,909,000 7,129,000
Lease vacancy costs. . . . . . . . . . . . . . . . . . 1,200,000 --
Income taxes payable . . . . . . . . . . . . . . . . . 1,227,000 333,000
60
63
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
Professional services. . . . . . . . . . . . . . . . . 4,027,000 8,583,000
Outside sales commissions. . . . . . . . . . . . . . . 478,000 831,000
Deferred income. . . . . . . . . . . . . . . . . . . . 2,397,000 2,294,000
Severance, restructuring and other
liabilities related to acquisitions. . . . . . . . . 478,000 4,509,000
Other. . . . . . . . . . . . . . . . . . . . . . . . . 2,376,000 6,898,000
---------- ----------
$ 21,397,000 $ 32,516,000
========== ==========
Other liabilities and deferred income taxes:
Deferred compensation plan . . . . . . . . . . . . . . $ 2,191,000 $ 1,919,000
Deferred income--Hoffmann. . . . . . . . . . . . . . . 3,791,000 4,147,000
Deferred income taxes. . . . . . . . . . . . . . . . . 109,000 528,000
Other. . . . . . . . . . . . . . . . . . . . . . . . . 923,000 2,754,000
---------- ----------
$ 7,014,000 $ 9,348,000
========== ==========
Prepaid expenses and other current assets include assets held for sale of
$1,218,000 at December 31, 1993 and $10,225,000 at December 31, 1992, which are
recorded at the lower of cost or net realizable value. During the fourth
quarter of 1993, Biomedicals moved its Italian operation from Cassina de
Pecchi, Italy, a leased facility, back to Opera, an owned facility. Therefore,
the Opera facility was reclassified from assets held for disposition to
Property, Plant and Equipment.
Other (income) expense, net:
1993 1992 1991
---- ---- ----
Realized (gains) losses from sale
of marketable securities, net. . . . . . . . . . . . $ (139,000) $ (228,000) $ 354,000
Amortization of goodwill . . . . . . . . . . . . . . . 2,102,000 4,216,000 3,944,000
Litigation settlements . . . . . . . . . . . . . . . . -- 1,247,000 7,143,000
Write-down of assets and intangibles . . . . . . . . . -- 2,000,000 --
Write-off prepaid royalties. . . . . . . . . . . . . . -- -- 1,503,000
Write-downs and other costs for
domestic nutrition group . . . . . . . . . . . . . . -- -- 10,878,000
Facility relocation expense
in Spain . . . . . . . . . . . . . . . . . . . . . . -- -- 2,198,000
Gain on lease termination. . . . . . . . . . . . . . . (938,000) -- --
Favorable settlement of a foreign non-income
tax dispute and accrued liability. . . . . . . . . . (1,680,000) -- --
License fees . . . . . . . . . . . . . . . . . . . . . -- 2,187,000 --
Lease vacancy costs. . . . . . . . . . . . . . . . . . 1,436,000 -- --
Other, net . . . . . . . . . . . . . . . . . . . . . . 298,000 5,765,000 3,459,000
---------- ---------- ----------
$ 1,079,000 $15,187,000 $29,479,000
========== ========== ==========
61
64
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
12. BUSINESS SEGMENTS AND GEOGRAPHICAL DATA
The Company operates in two industry segments: pharmaceuticals (the
"Pharmaceuticals group") and biomedicals (the "Biomedicals group"). The
Pharmaceuticals group is composed of SPI (accounted for as an unconsolidated
equity investee effective December 31, 1992), which produces and markets
pharmaceutical products in the United States, Mexico, Canada and Europe; and
Viratek, which conducts the Company's research and development efforts on
compounds derived from nucleic acids. The Biomedicals group is composed of
Biomedicals, which markets research chemical and cell biology products and
related services, biomedical instrumentation and immunodiagnostic reagents and
instrumentation.
Information regarding the Company's business segments and geographic data
for the years ended 1993, 1992 and 1991 is as follows:
62
65
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
1993 1992 1991
---- ---- ----
Net sales:(1)
Pharmaceuticals group. . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,480,000 $476,118,000 $364,358,000
Biomedicals group. . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,076,000 75,648,000 96,007,000
----------- ----------- -----------
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 62,556,000 $551,766,000 $460,365,000
=========== =========== ===========
Income (loss) before interest, provision for income taxes,
minority interest and extraordinary income:
Pharmaceuticals group (5). . . . . . . . . . . . . . . . . . . . . . . . $ 8,591,000 $ 55,610,000 $ 60,269,000
Biomedicals group. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,847,000 (97,234,000) (6,471,000)
----------- ----------- -----------
11,438,000 (41,624,000) 53,798,000
Corporate(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,370,000) 26,909,000 11,985,000
----------- ----------- -----------
Income (loss) before interest, provision for income taxes,
minority interest and extraordinary income . . . . . . . . . . . . . 6,068,000 (14,715,000) 65,783,000
Net interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . 18,962,000 25,562,000 34,321,000
----------- ----------- -----------
Income (loss) before provision for income taxes, minority
interest and extraordinary income. . . . . . . . . . . . . . . . . . . $(12,894,000) $(40,277,000) $ 31,462,000
=========== =========== ===========
DEPRECIATION AND AMORTIZATION CAPITAL EXPENDITURES
--------------------------------------------- ----------------------------------------
1993 1992 1991 1993 1992 1991
-------- -------- -------- -------- -------- --------
Pharmaceuticals group. . . . $ 1,770,000 $ 9,390,000 $ 9,536,000 $ 207,000 $11,610,000 $19,051,000
Biomedicals group. . . . . . 3,607,000 6,174,000 6,095,000 2,235,000 911,000 1,978,000
Corporate. . . . . . . . . . 1,985,000 2,046,000 535,000 106,000 33,000 17,000
---------- ---------- ---------- ---------- ---------- ----------
$ 7,362,000 $17,610,000 $16,166,000 $ 2,548,000 $12,554,000 $21,046,000
========== ========== ========== ========== ========== ==========
IDENTIFIABLE ASSETS
-------------------------------------------
1993 1992(4) 1991
------------ ------------ -----------
Pharmaceuticals group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $116,406,000 $111,768,000 $367,561,000
Biomedicals group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,806,000 67,548,000 170,540,000
Corporate (3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,644,000 44,252,000 36,985,000
------------ ------------ ------------
$207,856,000 $223,568,000 $575,086,000
============ ============ ============
63
66
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
INCOME (LOSS) BEFORE INTEREST, PROVISION FOR
TAXES AND MINORITY INTEREST,
NET SALES(1) AND EXTRAORDINARY INCOME
--------------------------------------------- --------------------------------------------
1993 1992 1991 1993 1992 1991
-------- -------- -------- -------- -------- --------
United States. . . . . . . $ 39,696,000 $ 92,769,000 $ 95,917,000 $ 13,022,000 $(54,864,000) $ (7,540,000)
Western Europe . . . . . . 16,311,000 62,311,000 74,225,000 (2,465,000) (29,315,000) 830,000
Yugoslavia . . . . . . . . -- 325,903,000 224,782,000 -- 37,692,000 57,190,000
Latin America. . . . . . . -- 48,654,000 41,691,000 -- 3,772,000 1,249,000
Canada . . . . . . . . . . 2,381,000 16,779,000 18,148,000 157,000 1,234,000 1,813,000
Asia/Pacific . . . . . . . 4,168,000 5,350,000 5,602,000 724,000 (143,000) 256,000
----------- ----------- ----------- ----------- ----------- -----------
$ 62,556,000 $551,766,000 $460,365,000 11,438,000 (41,624,000) 53,798,000
=========== =========== ===========
Corporate(2) . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . (5,370,000) 26,909,000 11,985,000
----------- ----------- -----------
$ 6,068,000 $(14,715,000) $ 65,783,000
=========== =========== ===========
IDENTIFIABLE ASSETS
----------------------------------------
1993 1992(4) 1991
-------- ----------- --------
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $152,301,000 $147,930,000 $169,747,000
Western Europe. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,928,000 29,298,000 115,329,000
Yugoslavia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 218,284,000
Latin America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 22,961,000
Canada. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 561,000 521,000 9,704,000
Asia/Pacific. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,422,000 1,567,000 2,076,000
----------- ----------- -----------
172,212,000 179,316,000 538,101,000
Corporate (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,644,000 44,252,000 36,985,000
----------- ----------- -----------
$207,856,000 $223,568,000 $575,086,000
=========== =========== ===========
(1) Sales between industry segments and geographic areas are not material.
(2) Corporate and other includes corporate general and administrative
expenses, net interest expense, other non-operating income and expense,
and unrealized gains and losses.
(3) Corporate assets exclude intercompany receivables, loans, advances and
investments.
(4) Excludes the amounts of SPI Pharmaceuticals, Inc. which was deconsolidated
at December 31, 1992, but includes ICN's investment in SPI in the
"Pharmaceuticals Group" and in the "United States".
(5) Included in Income (loss) before provision for taxes and minority interest
and extraordinary income for the United States and Pharmaceuticals group
for 1993 is $11,646,000 representing the equity in earnings of SPI.
64
67
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
The following tables set for the amount of net sales, income before
provision for income taxes and minority interest and identifiable assets of SPI
by geographical areas for 1993 (in thousands):
1993
----------------------------------------------------------------
INCOME (LOSS) BEFORE
INTEREST, PROVISION
FOR INCOME TAXES AND IDENTIFIABLE
SALES MINORITY INTEREST ASSETS
----- -------------------- ------------
United States $ 62,008 $ 25,756 $ 38,764
Yugoslavia 239,832 11,828 180,055
Mexico 57,782 7,371 33,874
Western Europe 30,601 4,079 33,284
Canada 13,734 851 6,155
Corporate -- (7,101) 9,885
-------- ------- --------
Income before interest,
provision for income tax
and minority interest -- $ 42,784 --
Net interest expense -- 15,717
------- --
Income before provision
for income taxes and
minority interest -- $ 27,067 --
=======
Total $ 403,957 $ 302,017
======== ========
During the year ended December 31, 1993, approximately 68% of Galenika's
sales were to the Federal Republic of Yugoslavia or government sponsored
entities. At December 31, 1993, there were no significant receivables from the
Yugoslavian government, however future sales of Galenika could be dependent on
the ability of the Yugoslavian government to generate cash to purchase
pharmaceuticals and the continuation of its current policy to buy products from
Galenika. No other customer accounts for more than 10% of SPI's net sales.
Export sales shipped from the United States for 1993, 1992 and 1991 were
$3,892,000, $8,857,000 (including SPI) and $8,034,000 (including SPI),
respectively.
13. SUPPLEMENTAL CASH FLOWS DISCLOSURES:
Supplemental information
The following table sets forth the amounts of interest and income taxes
paid for the years ended 1993, 1992 and 1991.
1993 1992 1991
---- ---- ----
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,918,000 $26,545,000 $30,057,000
---------- ---------- ----------
Income taxes paid. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 488,000 $ 2,435,000 $ 2,793,000
---------- ---------- ----------
65
68
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
On August 30, 1993, Biomedicals issued 300,000 and 390,000 shares of
preferred stock series "A" and "B", respectively, to ICN. In exchange, ICN
retired $11,000,000 of debt owed to ICN by Biomedicals and exchanged
13,368,449 shares of Biomedicals' common stock that ICN owned. See Note 4 "ICN
Biomedicals, Inc." concerning Biomedicals' preferred stock transaction.
During 1991, SPI acquired Galenika as follows:
Estimated fair value of net assets acquired:
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 162,581,000
Liabilities and minority interest. . . . . . . . . . . . . . . (104,280,000)
------------
58,301,000
Less consideration given:
SPI Stock contributed by ICN . . . . . . . . . . . . . . . . . 11,555,000
Obligation to Galenika . . . . . . . . . . . . . . . . . . . . 13,550,000
Fees and expenses. . . . . . . . . . . . . . . . . . . . . . . 3,000,000
Issuance of SPI common stock to employees. . . . . . . . . . . 9,000,000
Other consideration . . . . .. . . . . . . . . . . . . . . . . 6,743,000
------------
Net cash paid to Galenika $ 14,453,000
============
14. RESTRUCTURING COSTS AND SPECIAL CHARGES
In November 1989, Biomedicals acquired for $37,700,000 all of the issued
and outstanding common shares of Flow Laboratories, Inc. and Flow Laboratories
B.V. from GRC International, Inc. (formerly Flow General Inc.). These
companies together with their respective subsidiaries ("Flow"), constitutes the
Biomedical division of Flow General. The excess of the total purchase price
(including acquisition costs) over the fair value of net assets acquired was
$35,245,000, which was allocated to the excess of costs over net assets of
purchased subsidiaries and was being amortized over 40 years. Flow was a
manufacturer and distributor of several thousand biochemical products
worldwide. At the time of the acquisition, Biomedicals had concluded that Flow
was a significant complement to the company, since Flow had a major presence in
the European markets, which Biomedicals lacked at the time. Therefore, more
than products, Biomedicals acquired an international distribution network.
Since 1990, Biomedicals utilized this distribution network to introduce ICN
products. At the same time, it decided to phase out or to eliminate Flow low
margin products, certain other product lines which did not fit Biomedicals'
long-term strategies and to close down inefficient operations.
In prior years and the first three quarters of 1992, recoverability of
goodwill associated with the Flow acquisition was focused on the European
operations as Biomedicals had only a limited presence in Europe prior to the
Flow acquisition. Accordingly, Biomedicals used the expected future operating
income of the European operations in evaluating the recoverability of the Flow
goodwill. During 1991, Biomedicals initiated a restructuring program designed
to reduce costs, and improve operating efficiencies. The program included,
among other items, the consolidation, relocation and closure of certain
manufacturing and distribution facilities within the U.S. and Europe, which
were acquired in the Flow acquisition. Those measures, including a fifteen
percent reduction in the work force, were largely enacted during 1991 and
continued in 1992. Costs incurred relating to this restructuring plan during
1991 were $6,087,000.
66
69
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
During the fourth quarter of 1992, as a result of a continued decline in
sales and other factors, Biomedicals reassessed their business plan and
prospects for 1993 and beyond which included, among other things, the decision
to sell the last remaining major European manufacturing facility and to
restructure the previously acquired distribution network and European
operations in line with the revised sales estimates. Consequently, based upon
the continuing decline in European revenue and profitability relating to Flow,
Flow facility closures and an ineffective distribution network, management
concluded that there was no current or expected future benefit associated from
the Flow acquisition. Accordingly, Biomedicals wrote off goodwill and other
intangibles, primarily from the Flow acquisition of $37,714,000.
The relocation of various U.S., and European operations was re-evaluated.
It was determined that many of the operations did not support the costs of
maintaining separate facilities. Therefore, estimated costs associated with
lease termination, employee termination, facility shut-down (of facilities held
for disposition) were expensed primarily in the fourth quarter of 1992, and
amounted to $4,858,000.
During the fourth quarter of 1992, Biomedicals reassessed the valuation of
inventory, given the decline in sales and lack of effective integration of
Biomedicals' and Flow's product lines. Accordingly, Biomedicals recorded a
provision for abnormal write-downs of inventory to estimated realizable value
of $9,924,000 and discontinued products of $3,377,000.
In addition, during the fourth quarter of 1992, Biomedicals determined
that the unamortized costs of the catalog marketing program would not be
recovered within a reasonable period, therefore, costs totaling $6,659,000 were
written off. In the future, specifically focused customer or "product line"
catalogs will be used for customer product lines and a more focused general
catalog for others.
Restructuring and special charges of $63,032,000 and $6,087,000 are shown
as a separate item in the Consolidated Statement of Operations and include the
following for the years 1992 and 1991, no similar charges were incurred during
1993:
1992 1991
-------- --------
Goodwill and other intangibles. . . . . . . . . $37,714,000 $ --
Catalog . . . . . . . . . . . . . . . . . . . . 6,659,000 --
Inventory allowances. . . . . . . . . . . . . . 9,924,000 --
Discontinued products . . . . . . . . . . . . . 3,377,000 1,550,000
Employee termination costs. . . . . . . . . . . 1,961,000 1,866,000
Lease termination costs . . . . . . . . . . . . 1,434,000 737,000
Facility relocation costs . . . . . . . . . . . 357,000 724,000
Reduction to net realizable value of vacant
facilities held for disposition . . . . . . . 1,106,000 800,000
Miscellaneous restructuring costs . . . . . . . 500,000 410,000
---------- ----------
Total. . . . . . . . . . . . . . . . . $63,032,000 $ 6,087,000
========== ==========
67
70
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
15. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially expose the Company to
concentrations of credit risk, as defined by SFAS No. 105, consist primarily of
cash deposits and trade receivables. The Company places its cash deposits with
respected financial institutions and limits the amount of credit exposure to
any one financial institution. Biomedicals has $3,506,000 and $7,013,000 of
trade receivables in Italy at December 31, 1993 and 1992, respectively. The
ability to collect these receivables is influenced by the general economic
conditions in that country.
16. LEASE VACANCY COSTS
During 1993, Biomedicals vacated its High Wycombe facility in England and
moved to a facility more suitable to Biomedicals' operating needs in Thame,
England. Biomedicals pursued various subleasing agreements for which none were
consummated as of December 31, 1993. Consequently, Biomedicals accrued
approximately $1,200,000 which represents management's best estimate of the net
present value of future leasing costs to be incurred for High Wycombe. During
1993, Biomedicals expensed an additional $236,000 of leasing costs related to
this facility.
17. EQUITY INVESTMENT
Effective December 31, 1992, the Company's ownership percentage of SPI
fell below 50%, resulting in the deconsolidation of SPI in the Company's
consolidated financial statements as of December 31, 1992. The investment is
currently accounted for using the equity method of accounting. During 1993,
ICN received $2,159,000 in dividends from SPI. The condensed results of
operations for the year ended December 31, 1993 and the condensed financial
position of SPI as of December 31, 1993 and 1992 are summarized below.
SPI FINANCIAL POSITION
AS OF DECEMBER 31, 1993 AND 1992
(IN THOUSANDS)
--------------------------------
1993 1992
---- ----
Current assets. . . . . . . . . . $208,762 $235,963
Non-current assets. . . . . . . . 93,255 97,255
Current liabilities . . . . . . . 73,362 115,021
Non-current liabilities . . . . . 32,347 41,530
Minority interest . . . . . . . . 41,429 41,240
Stockholders' equity. . . . . . . 155,879 135,427
68
71
SPI RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS)
-------------------------------------
1993
----
Net sales . . . . . . . . . . . $403,957
Gross profit. . . . . . . . . . 192,034
Net income. . . . . . . . . . . 21,510
On October 21, 1992, SPI announced that it had concluded an agreement with
the Leningrad Industrial Chemical and Pharmaceutical Association to form a
pharmaceutical joint venture in Russia, ICN Oktyabr, in which SPI will have a
75% interest. The new joint venture was registered with the Russian Federation
on March 9, 1993. The joint venture represents a new business, and not the
acquisition of the existing business or assets of Oktyabr. Business operations
of the joint venture will commence on the completion of a business plan.
Oktyabr, which recently privatized, will contribute output from its current
production facilities until construction of a new facility is completed. SPI
will contribute management expertise, technology, equipment, intellectual
property, training and technical assistance to the new joint venture. Because
of the transition of the Russian economy into a free market oriented economy,
SPI plans for a gradual phase-in of the joint venture in 1994 and 1995. During
this phase-in period, the joint venture will develop training and marketing
strategies and begin constructing a new manufacturing facility in 1995 that is
scheduled to be fully operational in 1996. Because of this phase-in period,
SPI does not expect any current material effects on it operating results, as
well as, its capital resources and liquidity.
In addition to the joint venture, on March 24, 1994, SPI entered into an
Agreement with the City of St. Petersburg to acquire 15% of the outstanding
shares of its joint venture partner, Oktyabr, in exchange for approximately
30,000 shares of SPI's common stock. As part of this Agreement, SPI may
qualify to receive newly issued shares of Oktyabr pursuant to Russian
privatization regulations that will raise its total investment in Oktyabr to
43%. The issuance of these additional shares is subject to approval and
completion of an "investment plan." The completion of the investment plan will
not require any additional financial resources of SPI. SPI has also extended an
offer to the employees of Oktyabr to exchange their Oktyabr shares for SPI
shares. The Oktyabr employees currently own approximately 33% of the
outstanding shares, however, the number of employees that will exchange their
shares is uncertain. In the event that SPI qualifies under the investment plan
to raise its investment to 43%, it is possible that a sufficient number of
employees might exchange their Oktyabr shares for SPI shares so that total
SPI investment in Oktyabr would exceed 50%. If this event occurs, SPI would be
required to consolidate the financial results of Oktyabr into the financial
statements of SPI.
The condensed financial position of Galenika, a consolidated 75% owned
Yugoslavian subsidiary of SPI, as of December 31, 1993 and 1992, and the
condensed statements of income before provision for income taxes and minority
interest for the years ended December 31, 1993 and 1992 are presented below.
GALENIKA FINANCIAL POSITION
AS OF DECEMBER 31, 1993 AND 1992
(IN THOUSANDS)
---------------------------------
1993 1992
---- ----
Current assets. . . . . . . . . $157,291 $190,874
Non-current assets. . . . . . . 38,264 39,202
Current liabilities . . . . . . 18,400 41,258
Non-current liabilities . . . . 40,802 53,034
Stockholders' equity. . . . . . 136,353 135,784
69
72
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
GALENIKA CONDENSED RESULTS OF OPERATIONS BEFORE
PROVISION FOR INCOME TAXES
FOR THE YEAR ENDED DECEMBER 31, 1993 AND 1992
(IN THOUSANDS)
-----------------------------------------------
1993 1992
---- ----
Net sales. . . . . . . . . . . . . . . . . . $239,832 $325,903
Gross profit . . . . . . . . . . . . . . . . 83,643 173,985
Income before provision for income taxes . . 310 38,518
Sanctions:
A substantial majority of Galenika's business is conducted in the Federal
Republic of Yugoslavia (Serbia and Montenegro). On May 30, 1992, the UNSC
adopted a resolution that imposed economic sanctions on the Federal Republic of
Yugoslavia and on April 17, 1993, the UNSC adopted a resolution that imposed
additional economic sanctions on the Federal Republic of Yugoslavia. On April
26, 1993, the United States issued an executive order that implemented the
additional sanctions pursuant to the United Nations resolution. The new
sanctions continue to specifically exempt certain medical supplies for
humanitarian purposes, a portion of which are distributed by Galenika.
Galenika continues to apply for, and has received, licenses under the new
sanctions. The renewed efforts to enforce sanctions will create additional
administrative burdens that will slow the shipments of licensed raw materials
to Yugoslavia. Shipments of imported raw materials declined in 1993 to 38% of
prior year levels. Additionally, the new sanctions have contributed to an
overall deteriorating business environment in which Galenika must operate.
The new sanctions provide for the freezing of bank accounts of Yugoslavian
commercial and industrial entities. The implementation of new sanctions may
create a restriction on Galenika's cash holdings that are maintained in a bank
outside of Yugoslavia. Management believes, however, that these funds will be
available for drawdowns on lines of credit for shipments specifically licensed
under the new and prior sanctions. As a result of continuing political and
economic instability within Yugoslavia, including the long-term impact of the
sanctions, wage and price controls and devaluations, there may be further
limits on the availability of hard and local currency and consequently, an
adverse impact on the future operating results of SPI.
At December 31, 1992, Galenika had cash and cash equivalents of
$44,700,000 of which $15,200,000 was restricted as to use, invested with a
financial institution outside of Yugoslavia. These funds have been used for
letters of guarantee on Galenika's raw material purchases and to collateralize
the payment of dividends. During the first quarter 1993, $731,000 was
withdrawn under the letters of guarantee. Before the implementation of
additional sanctions in April 1993, approximately $9,885,000 was withdrawn
under the letters of guarantee. In October 1993, Galenika acquired marketable
securities with these funds in order to maximize their interest earned. The
marketable securities are maintained at the same financial institution. As of
December 31, 1993, at this institution, Galenika had $834,000 of hard currency
and $32,587,000 of marketable securities which are used to collateralize a
$10,000,000 note payable.
70
73
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
In order to conserve operating cash, the wages of all Galenika employees
were reduced to Yugoslavian minimum wage levels beginning in the fourth quarter
1993. To help alleviate the burden of sanctions and wage reductions, SPI
intends to expend funds for humanitarian aid in the form of food assistance for
Galenika employees. This aid will be subject to approval and licensing
required by UNSC sanctions. In the first quarter 1994, SPI obtained licenses
for approximately $280,000 of aid. The expenditure of future aid will be
dependent on the conditions in Yugoslavia and will be subject to obtaining
approval and licenses under UNSC sanctions.
Hyperinflation and Price Controls:
Under existing Yugoslavian price controls imposed in July 1992, Galenika
can no longer continue the unrestricted practice of increasing selling prices
in anticipation of inflation. Rather, price increases must be approved by the
government prior to implementation. The imposition of price controls along
with the effect of sanctions and recurring currency devaluations resulted in
reduced sales levels in the last half of 1992 and for 1993. This trend of
reduced sales levels is expected to continue as long as sanctions are in place.
As a result of decreased sales levels, management expects that profit margins
will decrease and overall operating expenses as a percentage of sales will
increase.
As a result of the hyperinflation in Yugoslavia, the Yugoslavian
government devalued the dinar on several occasions during 1993 and, on October
1, 1993, changed the denomination of the currency. The effect of the
devaluations, adjusted for the change in currency denomination, was to increase
the exchange rate from less than one dinar per $1 U.S. at the beginning of 1993
to over one trillion dinars per $1 U.S. at the end of 1993. In anticipation of
devaluations in 1993, SPI implemented a plan described below, to minimize its
monetary exposure. As a result of the devaluations and subsequent exchange
losses from obtaining hard currencies, Galenika experienced translation losses
of $173,000. While SPI cannot predict with any certainty the actual
remeasurement and exchange gains or losses that may occur in 1994, such amounts
may be substantial. Annual inflation is very high with some estimates of over
1 billion percent. Future devaluations are likely in the near term. At
December 31, 1993, Galenika's net monetary liability exposure was $2,093,000.
As a result of the non-tradability of the dinar, SPI is unable to effectively
hedge against the loss from devaluation.
SPI is taking action to generate the dinar cash needed to acquire hard
currency to reduce its monetary exposure. Galenika has access to short-term
borrowings at interest rates below the level of inflation. Galenika plans to
maximize its borrowings under these arrangements and use the proceeds to
acquire hard currency for the purchase of inventory. This strategy will
provide hard currency, accelerate the purchase of inventory to minimize the
effects of inflation, and reduce future transaction losses. This strategy will
also increase Galenika's monetary liabilities, and lower its risk of loss from
devaluations. This strategy, however, has resulted in increased interest
expense in 1993 and will result in high levels of interest expense in 1994.
In conjunction with a currency devaluation on July 23, 1993, the
Yugoslavian government announced that businesses in Yugoslavia can no longer
buy and sell hard currency in privately negotiated transactions. All purchases
of hard currency must be made through the National Bank of Yugoslavia based on
government approved allocations. This action could possibly limit the
availability of hard currency in the future for Galenika. However, if the
government is successful in controlling access to hard currency, SPI's
operations in Yugoslavia may benefit through increased allocations of hard
currency. Due to the strategic nature of pharmaceutical drugs in Yugoslavia,
Galenika has, in the past, received relatively favorable allocations of hard
71
74
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
currency from the government. For the year ended December 31, 1993, Galenika
received $12,744,000 in currency allocations.
On January 24, 1994, the Yugoslavian government enacted a "Stabilization
Program" designed to strengthen its currency. Under this program the official
exchange rate of the dinar is fixed at a ratio of one dinar to one Deutsche
mark. The Yugoslavian government guarantees the conversion of dinars to
Deutsche marks and is able to do so by exercising restraint in the amount of
dinars that it prints. Since the inception of this program the exchange rate
of dinars to Deutsche marks has remained stable. The impact of this change on
the future operations of Galenika is uncertain.
As required by Generally Accepted Accounting Principles ("GAAP"), SPI
translates Galenika financial results at the dividend payment rate established
by the National Bank of Yugoslavia. To the extent that changes in this rate
lag behind the level of inflation, sales and expenses will, at times, tend to
be inflated. Future sales and expenses can substantial increase if the timing
of future devaluations falls significantly behind the level of inflation.
While the impact of sanctions, price controls, and devaluations on the future
sales and net income cannot be determined with certainty, they may, under the
present political and economic environment, result in an adverse impact in the
future.
At December 31, 1993, Galenika has U.S. $33,421,000 invested with a
financial institution outside of Yugoslavia. These funds came from the initial
cash investment made by SPI of $14,453,000 and from the sale of SPI's stock
transferred to Galenika by ICN, also in conjunction with the acquisition.
Under the terms of the acquisition agreement, these funds were originally
intended to finance business expansion. However, in light of the current
economic conditions in Yugoslavia, these funds are used for letters of
guarantee on Galenika's raw material purchases and to collateralize the payment
of dividends. These funds are encumbered by a letter of guarantee for raw
material purchases, of which no amount was outstanding at December 31, 1993,
and $5,200,000 was outstanding at December 31, 1992, and as collateral for
$10,000,000 of loans included in Notes Payable bearing interest at 4.5%, that
were issued to pay the 1992 dividend of the same amount. Other uses of these
funds in the future, such as capital investment, additional letters of
guarantee, or future dividends are subject to review and licensing under the
UNSC sanctions. At December 31, 1993, these funds have been invested in bonds
and are recorded as marketable securities which were used to collateralize a
$10,000,000 notes payable. At December 31, 1992, these funds are included in
cash with $15,200,000 reflected as restricted cash.
As noted above, Galenika paid a $10,000,000 dividend in 1992 of which SPI
received 75% or $7,500,000. Yugoslavian law allows free distribution of
earnings whether to domestic (Yugoslavian) or international investors.
Galenika is allowed to pay dividends out of earnings calculated under
Yugoslavian Accounting Practices ("YAP"), not earnings calculated under GAAP.
As a result of the current level of inflation, the accumulated YAP earnings of
ICN Galenika are insignificant when stated in dollars. Future dividends from
Galenika will depend heavily on future earnings. Under GAAP, Galenika had
accumulated earnings, which are not available for distributions, of
approximately $61,787,000 at December 31, 1993. However, additional
repatriation of cash could be declared from contributed capital as provided for
in the original purchase agreement. In 1992, SPI made the decision to no
longer repatriate the earnings of Galenika and instead will use these earnings
for local operations and reduction of debt.
The current political and economic conditions in Yugoslavia could continue
to deteriorate to the point that SPI's investment in Galenika would be
threatened. Worsening political and economic conditions could also result in a
situation where SPI may be unable to exercise control over Galenika's
operations or be unable
72
75
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
to receive dividends from Galenika. Under these conditions, SPI would
no longer be able to continue to consolidate the financial information of
Galenika. In this situation, SPI would be required to deconsolidate Galenika
and account for its investment using the cost method of accounting and the
investment in Galenika would be carried at the lower of cost or realizable
value.
73
76
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
The following condensed financial statements reflect the parent company
only, ICN Pharmaceuticals, Inc. ("ICN"), accounting for its majority owned
subsidiaries, ICN Biomedicals, Inc. and Viratek, Inc., on the equity method of
accounting. Certain footnote disclosure has been omitted since the information
has been included in the ICN Pharmaceuticals, Inc. consolidated financial
statements included elsewhere in this Form 10-K.
ICN PHARMACEUTICALS, INC.
(PARENT COMPANY ONLY)
CONDENSED BALANCE SHEET
DECEMBER 31, 1993
(IN THOUSANDS)
1993
----
ASSETS
Current assets:
Cash and restricted cash of $1,262. . . . . . . . . . . $ 5,707
Receivable from SPI. . . . . . . . . . . . . . . . . . . 18,313
Other current assets . . . . . . . . . . . . . . . . . . 1,766
---------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . 25,786
---------
Property, plant and equipment, net . . . . . . . . . . . . 20,311
Goodwill, net. . . . . . . . . . . . . . . . . . . . . . . 10,652
Investment in SPI and subsidiaries. . . . . . . . . . . . 105,831
Other assets and deferred charges. . . . . . . . . . . . . 7,860
---------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . $ 170,440
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued liabilities. . . . . . . . . . . . . . . . . . $ 10,867
Note payable and current portion
of long-term debt. . . . . . . . . . . . . . . . . . . 13,014
---------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . 23,881
---------
Payable to affiliates, net . . . . . . . . . . . . . . . . 9,571
Long-term debt . . . . . . . . . . . . . . . . . . . . . . 128,480
Other liabilities . . . . . . . . . . . . . . . . . . . . . 4,488
Commitment and contingencies
Stockholders' equity
Common stock . . . . . . . . . . . . . . . . . . . . . . 20,519
Paid in capital. . . . . . . . . . . . . . . . . . . . . 180,897
Retained earnings (deficit). . . . . . . . . . . . . . . (193,711)
Cumulative translation adjustment. . . . . . . . . . . . (3,685)
---------
Total stockholders' equity . . . . . . . . . . . . . . 4,020
---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . $ 170,440
=========
See Notes to Condensed Financial Information
74
77
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
ICN PHARMACEUTICALS, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS)
1993
----
General and administrative expenses . . . . . $12,584
Amortization of goodwill. . . . . . . . . . . 1,600
Interest expense. . . . . . . . . . . . . . . 17,585
Gain on sales of stock. . . . . . . . . . . . (8,345)
Exchange gains. . . . . . . . . . . . . . . . (1,114)
Equity earnings in SPI. . . . . . . . . . . . (9,223)
Equity earnings in subsidiaries . . . . . . . (1,463)
Other income (expense), net . . . . . . . . . (206)
------
Loss before income taxes . . . . . . . . . . 11,418
Tax benefit . . . . . . . . . . . . . . . . . (148)
------
Net loss. . . . . . . . . . . . . . . . . . . $11,270
======
See Notes to Condensed Financial Information
75
78
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
ICN PHARMACEUTICALS, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS)
1993
----
Cash flows from operating activities:
Net loss $(11,270)
Adjustments to reconcile net loss to net
cash flow from (used in) operating
activities:
Equity earnings in subsidiaries (1,463)
Equity earnings in SPI (9,223)
Depreciation and amortization 3,557
Gain on sales of subsidiaries stock (8,345)
Exchange gains (1,114)
Other realized and unrealized gains (339)
Changes in assets and liabilities and other 5,478
-------
Net cash flows used in operating activities (22,719)
Cash flows from investing activities:
Sales of subsidiaries stock 23,319
Cash received from SPI 13,662
Cash payment to subsidiries (7,037)
Other net 251
-------
Net cash flows from investing activities 30,195
Cash flows from financing activities:
Proceeds from issuance of long-term debt 293
Payments on long-term debt (27,873)
Proceeds from stock issuance 25,163
Increase in restricted cash (1,000)
-------
Net cash flows used in financing activities (3,417)
Net increase in cash 4,059
Cash at beginning of year 386
-------
Cash at end of year $ 4,445
=======
See Notes to Condensed Financial Information
76
79
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
ICN PHARMACEUTICALS, INC.
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL INFORMATION
YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS)
Note 1 -- Dividends
During the year ended December 31, 1993 ICN received cash dividends of
$2,159 and $1,553, from SPI Pharmaceuticals, Inc. (a 39% owned equity
investment) and ICN Biomedicals, Inc., respectively.
Note 2 -- Long-Term Debt
See Note 7 of Notes to Consolidated Financial Statements for information
relating to long-term debt of ICN.
Annual aggregate maturities of long-term debt of ICN is as follows:
1994 . . . . . . . $ 10,714
1995 . . . . . . . 9,683
1996 . . . . . . . 35,008
1997 . . . . . . . 34,599
1998 . . . . . . . 29,220
Thereafter . . . . 19,970
--------
$139,194
========
Note 3 -- Commitments and Contingencies
ICN has an agreement with ICN Biomedicals, Inc., that ICN is prepared,
if necessary, to provide financial support to ICN Biomedicals, Inc. in order
for it to meet its financial obligations through April 15, 1995.
For disclosure of additional commitments and contingencies, see Note 9 of
Notes to Consolidated Financial Statements included elsewhere in this Form 10-K.
77
80
ICN PHARMACEUTICALS, INC.
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
CHARGED/ CHARGED
BALANCE AT CHARGED TO (CREDITED) TO DEDUCTIONS BALANCE
BEGINNING COSTS AND TO OTHER FROM AT END
OF YEAR EXPENSES ACCOUNTS RESERVES OF YEAR
---------- ---------- ---------- ------------- -------
Year ended December 31, 1993:
Allowance for doubtful
receivables $ 3,353 $ 168 $ -- $ 1,121 $ 2,400
------ ------ ------- ------ ------
Allowance for inventory
obsolescence $15,530 $ (454) $ -- $ 3,597 $11,479
====== ====== ======= ====== ======
Year ended December 31, 1992:
Allowance for doubtful
accounts $23,590 $50,564 $(59,569)(1) $11,232(3) $ 3,353
------- ------ -------- ------- ------
Allowance for inventory
obsolescence $ 8,915 $13,900 $ -- $ 7,285(3) $15,530
====== ====== ======= ======= ======
Year ended December 31, 1991:
Allowance for doubtful
accounts $ 3,227 $ 6,760 $ 15,702(2) $ 2,099 $23,590
------ ------ ------- ------- ------
Allowance for inventory
obsolescence $10,861 $ 4,297 $ (687) $ 5,556 $ 8,915
====== ====== ======= ======= ======
(1) The credit to other accounts is primarily due to the impact of
devaluations on outstanding allowance for doubtful accounts of SPI. In
hyperinflationary countries such as Yugoslavia a devaluation will result
in a reduction of accounts receivable and a proportionate reduction in the
accounts receivable allowance. The reduction of accounts receivable is
recorded as a foreign currency translation loss and the reduction of the
allowance is recorded as a translation gain. After the devaluation the
level of accounts receivable will rise as a result of subsequent price
increases. In conjunction with the rise in receivables, additions to the
allowance for receivables will be made for existing doubtful accounts.
This process will repeat itself for each devaluation that occurs during
the year. The effect of this process results in a high level of bad debt
expense that does not necessarily reflect difficulties in collecting
receivables. In 1992, general and administrative expenses increased
significantly due primarily to provisions for doubtful accounts at
Galenika of $48,279. The reduction of accounts receivable allowance
from devaluations resulted in a translation gain of $40,191 resulting
in a net expense from bad debts and bad debt translation gains of
$8,088.
(2) Results principally from Galenika purchase price allocation.
(3) Reflects a $(10,188) deduction from the allowance for doubtful accounts
and a $(3,671) deduction from the allowance for inventory obsolescence
relating to the deconsolidation of SPI Pharmaceuticals, Inc. effective
December 31, 1992.
78
81
ICN PHARMACEUTICALS, INC.
SCHEDULE IX -- SHORT-TERM BORROWINGS
(IN THOUSANDS)
WEIGHTED
MAXIMUM AVERAGE AVERAGE
WEIGHTED AMOUNT AMOUNT INTEREST
BALANCE AT AVERAGE OUTSTANDING OUTSTANDING RATE
END OF INTEREST DURING THE DURING THE DURING THE
PERIOD RATE PERIOD PERIOD(1) PERIOD(2)
---------- -------- ----------- ----------- ----------
Year ended December 31, 1993:
Notes payable to banks $ 4,226 13.96% $16,157 $ 7,599 8.1%
------ ----- ------ ------ ----
Year ended December 31, 1992:
Notes payable to banks $15,277 12.58% $15,276 $ 8,162 21.0%
------ ----- ------ ------ ----
Year ended December 31, 1991:
Notes payable to banks $23,188 33.6% $35,722 $25,798 37.6%
------ ---- ------ ------ ----
(1) Calculated by dividing the total month-end outstanding borrowings by 12
months.
(2) Calculated by dividing the total interest expense during the period on
short-term borrowings by the monthly average short-term borrowings
outstanding during the period.
79
82
ICN PHARMACEUTICALS, INC.
SCHEDULE X -- SUPPLEMENTARY INCOME STATEMENT INFORMATION
(In thousands)
YEAR ENDED DECEMBER 31, 1993:
Maintenance and repairs . . . . . . . . . . $ 919
Advertising . . . . . . . . . . . . . . . . $ 1,813
Amortization of intangible assets . . . . . $ 3,765
YEAR ENDED DECEMBER 31, 1992:
Maintenance and repairs . . . . . . . . . . $ 8,654
Advertising . . . . . . . . . . . . . . . . $14,697
Amortization of intangible assets . . . . . $ 6,468
YEAR ENDED DECEMBER 31, 1991:
Maintenance and repairs . . . . . . . . . . $ 5,456
Advertising . . . . . . . . . . . . . . . . $15,324
Amortization of intangible assets. . . . . $ 6,686
80
83
REPORT OF INDEPENDENT AUDITORS
To SPI Pharmaceuticals, Inc.:
We have audited the consolidated financial statements and the financial
statement schedules of SPI Pharmaceuticals, Inc. (a Delaware corporation) and
subsidiaries listed in the index on page 26 of this Form 10-K. These
consolidated financial statements and financial statement schedules are the
responsibility of the Company's Management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by Management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The Company has had certain transactions with its parent and Affiliated
Corporations as more fully described in Notes 1, 3 and 4 to the consolidated
financial statements. Whether the terms of these transactions would have been
the same had they been between wholly unrelated parties cannot be determined.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of SPI Pharmaceuticals, Inc. and subsidiaries as of December 31, 1993 and
1992, the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1993 in conformity
with generally accepted accounting principles. In addition, in our opinion,
the financial statement schedules referred to above, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects, the information required to be included therein.
COOPERS & LYBRAND
Los Angeles, California
February 24, 1994, except
for Note 15, as to which
the date is March 24, 1994
81
84
SPI PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1993 and 1992
ASSETS
1993 1992
-------------- --------------
Current Assets:
Cash and cash equivalents....................... $ 14,777,000 $ 38,054,000
Restricted cash................................. -- 15,200,000
Marketable securities (used to collateralize
$10,000,000 note payable)..................... 32,587,000 --
Receivables, net................................ 43,277,000 78,032,000
Inventories, net................................ 107,196,000 91,109,000
Prepaid expenses and other current assets....... 10,925,000 13,568,000
------------ ------------
Total current assets.......................... 208,762,000 235,963,000
Property, plant and equipment, net................. 78,718,000 81,494,000
Other assets....................................... 12,873,000 13,749,000
Goodwill........................................... 1,664,000 2,012,000
------------ ------------
$302,017,000 $333,218,000
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable..................................... $ 14,360,000 $ 16,322,000
Current portion of long-term debt................. 3,866,000 4,292,000
Trade payables.................................... 13,951,000 37,526,000
Accrued liabilities............................... 17,700,000 23,581,000
Current portion of payable to ICN................. 18,313,000 20,160,000
Income taxes payable.............................. 13,313,000 13,140,000
------------ ------------
Total current liabilities....................... 81,503,000 115,021,000
Long-term debt, less current portion.............. 16,980,000 21,016,000
Payable to ICN, less current portion.............. -- 10,273,000
Other liabilities and deferred income taxes....... 6,226,000 10,241,000
Minority interest................................. 41,429,000 41,240,000
Commitments and Contingencies
Stockholders' equity:
Common stock, $.01 par value; 38,000,000 shares
authorized; 20,101,000 and 17,890,000 shares
issued and outstanding at December 31, 1993
and 1992, respectively.......................... 202,000 179,000
Additional capital.............................. 91,449,000 62,403,000
Retained earnings............................... 70,973,000 74,787,000
Foreign currency translation adjustment......... (6,745,000) (1,942,000)
------------ ------------
Total stockholders' equity................... 155,879,000 135,427,000
------------ ------------
$302,017,000 $333,218,000
------------ ------------
The accompanying notes are an integral part of these consolidated statements.
82
85
SPI PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1993, 1992 and 1991
1993 1992 1991
------------ ------------ ------------
Net sales....................... $403,957,000 $476,118,000 $364,358,000
Cost of sales................... 211,923,000 208,745,000 173,554,000
------------ ------------ ------------
Gross profit.................. 192,034,000 267,373,000 190,804,000
Selling, general and
administrative expenses....... 131,069,000 170,313,000 99,942,000
Royalties to affiliates, net.... 6,121,000 5,511,000 4,377,000
Research and development costs.. 11,516,000 7,836,000 4,901,000
Translation and exchange
(gains) losses, net........... (3,282,000) 25,039,000 6,697,000
Interest income................. (8,033,000) (9,679,000) (3,678,000)
Interest expense................ 23,750,000 13,065,000 8,965,000
Other expense, net.............. 3,826,000 2,082,000 16,757,000
Income before provision
for income taxes and
minority interest........... 27,067,000 53,206,000 52,843,000
Provision for income taxes...... 5,368,000 9,095,000 10,852,000
Minority interest............... 189,000 9,608,000 11,865,000
------------ ------------ ------------
Net income.................... $ 21,510,000 $ 34,503,000 $ 30,126,000
------------ ------------ ------------
Net income per share $1.08 $1.76 $1.57
============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
83
86
SPI PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
COMMON STOCK FOREIGN
--------------------- CURRENCY
NUMBER OF ADDITIONAL RETAINED TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENTS TOTAL
------ ------ ------- -------- ----------- -----
BALANCE AT NOVEMBER 30, 1990 15,638,000 $156,000 $50,062,000 $43,652,000 $2,065,000 $95,935,000
December 1990 net loss -- -- -- (50,000) -- (50,000)
Proceeds from the exercise
of stock options 594,000 6,000 3,086,000 -- -- 3,092,000
Translation adjustments -- -- -- -- (78,000) (78,000)
Temporary treasury stock
holdings in connection
with the acquisition
of ICN Galenika (1,101,000) (11,000) (35,627,000) -- -- (35,638,000)
Common stock issued in
connection of ICN Galenika 1,200,000 12,000 8,988,000 -- -- 9,000,000
Acquisition of intangibles
from an affiliate -- -- (1,600,000) -- -- (1,600,000)
Tax benefit of stock options
exercised -- -- 2,308,000 -- -- 2,308,000
Cash dividends ($.89
per share) -- -- -- (14,961,000) -- (14,961,000)
Net income -- -- -- 30,126,000 -- 30,126,000
-----------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1991 16,331,000 163,000 27,217,000 58,767,000 1,987,000 88,134,000
Proceeds from the exercise
of stock options 327,000 3,000 2,175,000 -- -- 2,178,000
Translation adjustments -- -- -- -- (3,929,000) (3,929,000)
Sale of temporary treasury
stock holdings in connection
with the acquisition of ICN
Galenika 900,000 9,000 28,619,000 -- -- 28,628,000
Tax benefit of stock options
exercised -- -- 956,000 -- -- 956,000
Cash dividends ($.78 per share) -- -- -- (15,043,000) -- (15,043,000)
Effect of stock dividend issued
in January 1993 332,000 4,000 3,436,000 (3,440,000) -- --
Net income -- -- -- 34,503,000 -- 34,503,000
-----------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1992 17,890,000 179,000 62,403,000 74,787,000 (1,942,000) 135,427,000
Proceeds from the exercise
of stock options 461,000 5,000 2,410,000 -- -- 2,415,000
Translation adjustments -- -- -- -- (4,803,000) (4,803,000)
Tax benefit of stock options
exercised -- -- 727,000 -- -- 727,000
Cash dividends ($.25 per share) -- -- -- (4,690,000) -- (4,690,000)
Effect of 1993 quarterly stock
dividends 1,121,000 11,000 16,106,000 (16,117,000) -- --
Effect of stock dividend
issued in January 1994 276,000 3,000 4,514,000 (4,517,000) -- --
Common stock issued for
payment of ICN debt 200,000 2,000 3,073,000 -- -- 3,075,000
Common stock issued
for acquisition 153,000 2,000 2,216,000 -- -- 2,218,000
Net income -- -- -- 21,510,000 -- 21,510,000
-----------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 20,101,000 $202,000 $91,449,000 $70,973,000 $(6,745,000) $155,879,000
=============================================================================
The accompanying notes are an integral part of these consolidated statements.
84
87
SPI PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
1993 1992 1991
---- ---- ----
Cash flows from operating activities:
Net income $21,510,000 $34,503,000 $30,126,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 8,513,000 6,770,000 7,928,000
Allowance for losses on
accounts receivable 11,261,000 48,312,000 6,740,000
Write-off of goodwill and intangibles -- -- 9,102,000
Write-off of fixed assets -- -- 1,664,000
Foreign exchange (gains) losses, net (3,282,000) 14,739,000 6,697,000
(Gain) loss on sale of fixed assets (194,000) 151,000 (356,000)
Increase in inventory allowances 4,252,000 2,456,000 2,608,000
Income taxes contributed by ICN -- -- 2,308,000
Other non-cash losses 1,312,000 -- 95,000
Minority interest 189,000 9,608,000 11,865,000
Change in assets and liabilities
net of effects from
purchase of acquired companies:
Receivables 19,968,000 19,151,000 (74,017,000)
Inventories (15,388,000) (37,491,000) 10,192,000
Prepaid expenses and
other current assets 3,164,000 (4,640,000) (13,591,000)
Deferred income taxes (1,673,000) 1,741,000 16,560,000
Trade payables and accrued
liabilities (29,331,000) (25,448,000) 37,966,000
Income taxes payable 1,795,000 5,711,000 342,000
Other liabilities (3,889,000) (45,845,000) 566,000
---------- ---------- ----------
Net cash provided
by operating activities 18,207,000 29,718,000 56,795,000
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures (8,431,000) (11,610,000) (19,051,000)
Proceeds from sale of fixed assets 1,131,000 1,252,000 801,000
Purchase of marketable securities (33,899,000) -- --
Utilization of net operating
loss carryforwards
from acquired subsidiaries -- -- 1,174,000
(Increase) decrease in
restricted cash 15,200,000 (15,200,000) --
Payments for purchase
of acquired companies
and product lines -- -- (14,453,000)
Other, net 205,000 222,000 (104,000)
---------- ---------- ----------
Net cash used in
investing activities (25,794,000) (25,336,000) (31,633,000)
---------- ---------- ----------
Cash flows from financing activities:
Net increase (decrease)
in borrowings under line of
credit arrangements (1,487,000) 4,270,000 5,860,000
Proceeds from issuance
of long-term debt 4,207,000 9,588,000 1,891,000
Payments on long-term debt (4,644,000) (7,285,000) (322,000)
Payments to ICN (13,662,000) (14,987,000) (19,278,000)
Proceeds from stock issuances 2,415,000 32,994,000 3,092,000
Dividends paid to
minority stockholders (2,531,000) (7,525,000) (4,180,000)
---------- ---------- ----------
Net cash provided by (used in)
financing activities (15,702,000) 17,055,000 (12,937,000)
---------- ---------- ----------
Effect of exchange rate changes on cash 12,000 (54,000) (322,000)
---------- ---------- ----------
Net increase (decrease) in
cash and cash equivalents (23,277,000) 21,383,000 11,903,000
Cash and cash equivalents
at beginning of year 38,054,000 16,671,000 4,768,000
---------- ---------- ----------
Cash and cash equivalents
at end of year $14,777,000 $ 38,054,000 $ 16,671,000
========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
85
88
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
1. RELATIONSHIP WITH ICN PHARMACEUTICALS, INC., ICN BIOMEDICALS, INC.
AND VIRATEK, INC.:
SPI Pharmaceuticals, Inc. ("SPI" or the "Company") was incorporated on
November 30, 1981, as a wholly-owned subsidiary of ICN Pharmaceuticals,
Inc. ("ICN") and is 39%-owned by ICN at December 31, 1993. ICN Biomedicals,
Inc. ("Biomedicals") is 69%-owned by ICN and Viratek, Inc. ("Viratek") is
63%-owned by ICN at December 31, 1993.
During 1993, ICN sold 1,618,200 shares of the Company's common stock
for an aggregate sales price of $19,995,000 in open market transactions and
privately negotiated sales. During 1992, ICN sold 690,000 shares of the
Company's common stock for an aggregate sales price of $13,786,000 in open
market transactions and privately negotiated sales and in 1991 used 1,468,000
shares in the formation of ICN Galenika, of which 1,200,000 shares were sold
for cash during 1992 by ICN Galenika.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Reclassifications
Certain prior year items have been reclassified to conform with the
current year presentation.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and all subsidiaries after elimination of all significant
intercompany account balances and transactions. ICN Galenika has been
consolidated since the effective date of acquisition, May 1, 1991 (see Note
11 of Notes to Consolidated Financial Statements).
Goodwill
The difference between the purchase price and the fair value of net
assets purchased at the date of acquisition is included in the accompanying
Consolidated Balance Sheets as Goodwill. Goodwill amortization periods are
five years for single product line businesses acquired through November 30,
1986, and 10 to 23 years for certain businesses acquired in 1987, which have
other intangibles (patents, trademarks, etc.), and whose values and lives can
be reasonably estimated. The Company periodically evaluates the carrying value
of goodwill including the related amortization periods. The Company
determines whether there has been impairment, if any, by comparing the
anticipated undiscounted future operating income of the acquired entity with
the carrying value of the goodwill. In 1991, goodwill was reduced by
$1,174,000 due to the utilization for federal income tax purposes of net
operating loss ("NOL") carryforwards from domestic subsidiaries acquired in
1987 (see Note 4 of Notes to Consolidated Financial Statements.
Cash and Cash Equivalents
Cash and cash equivalents at December 31, 1993 and 1992, includes
$1,247,000 and $45,362,000, respectively, of commercial paper and bonds, both
of which have maturities of three months or less. For purposes of the
Statements of Cash Flows, the Company considers highly liquid investments
purchased with a maturity of three months or less to be cash equivalents. The
carrying amount of those assets approximates fair value due to the short-term
maturity of these instruments. Of the above cash and cash equivalents at
December 31, 1992, $15,200,000 was utilized to guarantee ICN Galenika's raw
material purchases and to collateralize notes payable, and is reflected as
restricted cash.
86
89
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Marketable Securities
Marketable securities, which consist of bond investments, are stated
at the lower of cost of market, based upon quoted market prices. Unrealized
gains and losses on marketable securities are charged to income. Realized
gains or losses are determined on the specific identification method and are
reflected in income. Marketable securities had an aggregate cost at December
31, 1993, of $33,899,000. A valuation allowance in the amount of $1,312,000
has been recorded to reduce the carrying amount of the portfolio to fair value,
which represents the net unrealized loss included in the determination of net
income for 1993. These investments are used to collateralize a note payable of
$10,000,000.
Inventories
Inventories, which include material, direct labor and factory overhead,
are stated at the lower of cost or market. Cost is determined on a first-in,
first-out ("FIFO") basis.
Property, Plant and Equipment
The Company primarily uses the straight-line method for depreciating
property, plant and equipment over their estimated useful lives. Buildings and
related improvements are depreciated from 7-50 years, machinery and equipment
from 5-15 years, furniture and fixtures from 5-10 years, and leasehold
improvements are amortized over their useful lives, limited to the life of the
lease.
The Company follows the policy of capitalizing expenditures that
materially increase the lives of the related assets and charges maintenance and
repairs to expense. Upon sale or retirement, the costs and related accumulated
depreciation or amortization are eliminated from the respective accounts, and
the resulting gain or loss is included in income.
Notes Payable
The Company classifies bank borrowings with initial terms of one year or
less as Notes Payable. At December 31, 1993, these notes had average interest
rates of 10% in Spain and 4% to 25% in Yugoslavia. The comparatively low
year-end interest rates in Yugoslavia are a result of the favorable effect on
variable interest rates arising from the Yugoslavian "Stabilization Program"
that was started in January 1994. See Note 12 of Notes to Consolidated
Financial Statements for information on the "Stabilization Program." The
carrying amount of notes payable approximates fair value due to the short-term
maturity of these instruments.
Foreign Currency Translation
The assets and liabilities of the Company's foreign operations, except
those in highly inflationary economies, are translated at the end of period
exchange rates. Revenues and expenses are translated at the average exchange
rates prevailing during the period. The effects of unrealized exchange rate
fluctuations on translating foreign currency assets and liabilities into U.S.
dollars are accumulated in Stockholders' equity. The monetary assets and
liabilities of foreign subsidiaries in highly inflationary economies are
remeasured into U.S. dollars at the year-end exchange rates and non-monetary
assets and liabilities at historical rates. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation,"
the Company has included in operating income all foreign exchange (gains) and
losses arising from foreign currency transactions and the effects of foreign
exchang rate fluctuations on subsidiaries operating in highly inflationary
economies. The (gains) losses included in operations from foreign exchange
translation and transactions for 1993, 1992 and 1991, were ($3,282,000),
$25,039,000, and $6,697,000, respectively.
87
90
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Income Taxes
In January 1993, the Company adopted SFAS 109, Accounting for Income
Taxes. SFAS 109 requires an asset and liability approach be used in the
recognition of deferred tax assets and liabilities for the expected future tax
consequence of events that have been recognized in the Company's financial
statements or tax returns.
Per Share Information
Per share information is based on the weighted average number of common
shares outstanding and dilutive common share equivalents. Common equivalent
shares represent shares issuable for outstanding options, on the assumption
that the proceeds would be used to repurchase shares in the open market.
In March and July 1991, the Company declared 10% and 15% stock
distributions, respectively, which resulted in a 26% stock split. In January
1993, the Company issued a fourth quarter 1992 stock dividend of 2%. During
1993, the Company issued quarterly stock dividends which totaled 6%. In
January 1994, the Company declared a first quarter 1994 stock dividend of 1.4%.
All share and per share amounts used in computing earnings per share have been
restated to reflect these stock splits and dividends. The number of shares
used in the per share computations were 19,898,000 in 1993, 19,594,000 in 1992,
and 19,131,000 in 1991.
3. RELATED PARTY TRANSACTIONS:
General
ICN controls Biomedicals and Viratek through stock ownership, voting
control and board representation and is affiliated with the Company. Certain
officers of ICN occupy similar positions with SPI, Biomedicals and Viratek and
are affiliated with the Company. ICN, SPI, Biomedicals and Viratek
(collectively, the "Affiliated Corporations") have engaged in, and will
continue to engage in, certain transactions with each other.
An Oversight Committee of the Boards of Directors of ICN, SPI,
Biomedicals and Viratek reviews transactions between or among the affiliated
corporations to determine whether a conflict of interest exists with respect to
aparticular transaction and the manner in which such a conflict can be
resolved. The Oversight Committee has advisory authority only and makes
recommendations to the Boards of Directors of each of the Affiliated
Corporations. The Oversight Committee consists of one non-management director
of each Affiliated Corporation and a non-voting chairman. The significant
related party transactions have been reviewed and recommended for approval by
the Oversight Committee, and approved by the respective Boards of Directors.
Royalty Agreements
Effective December 1, 1990, the Company entered into a royalty agreement
with Viratek whereby a royalty of 20% on all sales of Virazole is paid to
Viratek. Sales of Virazole for 1993, 1992 and 1991 were $29,515,000,
$27,240,000 and $21,315,000, respectively, which generated royalties to Viratek
for 1993, 1992 and 1991 of $5,903,000, $5,448,000 and $4,263,000, respectively.
During 1991, the Company purchased $235,000 of Virazole from Viratek and
received $2,943,000 of Virazole from Viratek at its cost.
Under an agreement between ICN and the employer of a director of Viratek,
the Company is required to pay a 2% royalty to the employer on all sales of
Virazole in aerosolized form. Such royalties for 1993, 1992 and 1991 were
$422,000, $430,000 and $313,000, respectively.
88
91
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
The Company markets products under license from ICN for the treatment of
myasthenia gravis, a disease characterized by muscle weakness and atrophy.
ICN charged the Company royalties at the rate of 9% of net sales. Effective
September 1, 1990, SPI prepaid royalties to ICN in the amount of $9,590,000,
which has been recorded in Other Assets and is being amortized using the
straight-line method over fifteen years. There are no future royalties due to
ICN for these products.
Beginning in December 1986, the Company began selling Brown
Pharmaceuticals, Inc. products under license from ICN. ICN charges the Company
royalties at the rate of 8-1/2% of net sales. During 1993, 1992 and 1991, the
Company paid ICN $218,000, $65,000 and $93,000, respectively, in royalties under
this agreement.
Cost Allocations
The Affiliated Corporations occupy ICN's facility in Costa Mesa,
California. The accompanying consolidated statements of income include charges
for rent and property taxes from ICN of $279,000 for each of the last three
years. In addition, the costs of common services such as maintenance,
purchasing and personnel are incurred by the Company and allocated to ICN,
Viratek and Biomedicals based on services utilized. The total of such costs
were $2,584,000 in 1993, $2,556,000 in 1992 and $2,617,000 in 1991 of which
$1,733,000, $1,679,000 and $1,568,000, were allocated to the Affiliated
Corporations, respectively. It is Management's belief that the methods used and
amounts allocated for facility costs and common services are reasonable based
upon the usage by the respective companies.
Investment Policy
ICN and the Company have a policy covering intercompany advances and
interest rates, and the types of investments (marketable equity securities, high
yield bonds, etc.) to be made by ICN and its subsidiaries. Under this policy
excess cash held by ICN's subsidiaries is transferred to ICN and, in turn, cash
advances are made to ICN's subsidiaries to fund certain transactions. ICN
charges or credits interest based on the amounts invested or advanced, current
interest rates and the cost of capital. During 1993, 1992 and 1991, the Company
was (charged) or credited interest of ($800,000), ($1,195,000), and $2,486,000
respectively. During 1993 and 1992, the Company reclassified its Biomedicals
intercompany receivable of $2,333,000 and $3,631,000 and its Viratek
intercompany payable of $5,228,000 and $6,332,000, respectively, to the
Company's ICN intercompany account resulting in a net increase in the Company's
liability to ICN of $2,041,000 and $2,701,000, respectively.
Debt and Equity Transactions
In accordance with its investment policy, ICN has advanced funds to the
Company for acquisitions, certain investments and to provide working capital.
Interest is charged on these advances at prime (6% at December 31, 1993) plus
1/2%.
On November 15, 1993, the Company issued 200,000 shares of common stock to
ICN in exchange for reducing its debt outstanding to ICN by $3,075,000.
The value of the shares issued was based on the quoted share price on
the transaction date.
On December 31, 1991, in connection with the ICN Galenika agreement,
ICN, on behalf of the Company, contributed 1,468,000 shares of common stock of
the Company to ICN Galenika. The transfer of the stock resulted in a liability
of the Company to ICN based on the stock's fair value of $38,528,000. ICN's
cost basis in the stock of $11,555,000 was used to record the Company's
investment in ICN Galenika. In consolidation, the Company recorded 1,101,000
shares of stock for $8,665,000 as treasury stock which represents its 75%
interest in ICN Galenika. The remaining 367,000 shares for $2,890,000 were
recorded as a component of minority interest and are considered issued and
outstanding. Pending sale of the stock to third parties, the $26,973,000
difference between
89
92
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
the fair value of the stock and the predecessor basis (ICN's cost) was
recorded as a reduction of paid-in capital. As the stock is sold, the excess of
the stock proceeds over the predecessor basis represents an additional
investment by SPI, resulting in an increase in paid-in capital. During 1992,
ICN Galenika sold 1,200,000 shares of SPI stock for proceeds of $30,822,000.
Net of amounts attributable to minority interest, the sale of the stock
increased paid-in capital and decreased treasury stock by $28,628,000.
Other
During 1991, the Company's Mexican subsidiary purchased inventory from
Biomedicals for approximately $500,000 which was returned to Biomedicals for
credit in 1992.
During 1991, the Company acquired a manufacturing facility in Mississippi
from ICN at ICN's cost of $3,114,000.
During 1991, the Company acquired various licenses and patents from ICN
and Viratek which it has contributed to ICN Galenika as part of the acquisition
agreement. The Company incurred a liability to ICN and Viratek totaling
$1,600,000 and a corresponding reduction of paid-in-capital.
Following is a summary of transactions, as described above, between the
Company and ICN and its subsidiaries for 1993, 1992 and 1991 (in thousands) :
1993 1992 1991
---- ---- ----
Transactions..........................................
Cash payments to ICN, net........................... $13,662 $ 14,987 $ 19,278
Royalties to affiliates, net........................ (6,121) (5,511) (4,377)
Purchases of Virazole from Viratek................. --- --- (235)
Allocation of common service costs to
ICN and its subsidiaries.......................... 1,733 1,679 1,568
Rent and property taxes charged by ICN.............. (279) (279) (279)
Interest income (expense) with affiliates........... (800) (1,195) 2,486
Dividends payable to ICN............................ (1,857) (7,518) (10,781)
Transfer of Mississippi plant from ICN.............. --- --- (3,114)
Debt to ICN arising from ICN Galenika transaction... --- --- (52,831)
Transfer of intangibles and inventory from ICN
and Viratek....................................... --- --- (4,543)
Return (purchase) of inventory from Biomedicals..... --- 500 (500)
Purchase of equipment from Viratek.................. --- --- (333)
Common stock issued for payment of ICN debt......... 3,075 --- ---
Federal income taxes payable to ICN................. --- (876)
Payments of Viratek royalties....................... --- 819 ---
Allocation of payroll costs......................... --- 507 754
December 1990 transactions, net..................... --- --- (865)
Other, net......................................... 2,707 465 2,251
------ ----- ------
$12,120 $ 4,454 $(52,397)
====== ===== ======
The average balances due to (from) ICN were $26,439,000, $29,289,000, and
$(18,326,000) for 1993, 1992 and 1991, respectively.
90
93
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1993
4. Income taxes:
In January 1993, the Company adopted SFAS 109, Accounting for Income
Taxes. SFAS 109 is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequence of events that have been recognized in the Company's
financial statements or tax returns. In estimating future tax consequences,
SFAS 109 generally considers all expected future events other than enactment
of changes in the tax law or rates. Previously, the Company used the SFAS 96
asset and liability approach that gave no recognition to future events other
than the recovery of assets and settlement of liabilities at their carrying
amounts. The adoption of SFAS 109 did not result in a cumulative effect
adjustment in the consolidated statements of income.
Pretax income from continuing operations before minority interest for the
years ended December 31 consists of the following:
1993 1992 1991
Domestic $17,322,000 $6,371,000 $(1,246,000)
Foreign .......... 9,745,000 46,835,000 54,089,000
----------- ---------- ------------
$27,067,000 $53,206,000 $52,843,000
=========== =========== ===========
The income tax provisions consist of the following:
Current
- -------
Foreign ......... $1,929,000 $1,493,000 $2,809,000
Federal ......... 4,197,000 5,876,000 4,331,000
State ......... 100,000 100,000 150,000
---------- ---------- ----------
6,226,000 7,469,000 7,290,000
---------- --------- ----------
Deferred
- --------
Foreign ...... (858,000) 1,185,000 472,000
Federal ...... --- 441,000 3,090,000
State ...... --- --- ---
--------- ---------- ---------
(858,000) 1,626,000 3,562,000
----------- ---------- -----------
Total......... $ 5,368,000 $9,095,000 $10,852,000
=========== ========== ===========
The current federal tax provision has not been reduced for the tax
benefit associated with the exercise of employee stock options. The tax benefit
from the exercise of employee stock options was credited to paid-in capital in
1993, 1992, and 1991, in the amounts of $727,000, $956,000, and $2,308,000,
respectively.
The 1993 foreign deferred tax provision benefit relates primarily to the
tax effect of litigation reserves. The 1991 federal deferred tax provision
relates primarily to U.S. taxes provided on the undistributed earnings of ICN
Galenika.
During 1991, the Company provided U.S. deferred tax on the undistributed
earnings of ICN Galenika due to the Company's intention to repatriate (rather
than permanently reinvest) the earnings of this foreign subsidiary. However in
1992, the Company reversed the previously provided U.S. deferred tax. The U.S.
deferred tax on the undistributed earnings of ICN Galenika was reversed due to
the Company's intention to use these earnings to fund the Company's planned
Eastern European expansion. In the future, U.S. tax will only be provided on
ICN Galenika's earnings when such earnings are repatriated via dividend or are
deemed distributed to the Company under U.S. tax law.
91
94
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1993
In 1987, the Company acquired certain domestic corporations with existing
net operating loss (""NOL"") carryforwards. On November 30, 1989, these
corporations were merged into the Company and the NOL carryforwards from these
subsidiaries were utilized by the Company to partially offset domestic taxable
income for 1991 and 1990. The federal tax benefit of $1,174,000 related to the
utilization of the NOL for 1991 was credited to goodwill.
The primary components of the Company's net deferred tax liability at
December 31, 1993, and January 1, 1993, are as follows:
December 31, 1993 January 1, 1993
Deferred tax assets:
Inventory and other reserves $ 1,421 $ 1,830
Compensation not currently deductible 330 242
Foreign tax credit carryover 700 1,400
Alternative minimum tax credit carryover --- 413
Reserve for litigation loss 368 ---
Promotional expenditures 528 ---
Work force reductions 345 ---
Other 733 1,080
Valuation reserve (2,307) (4,682)
-------- -------
Total deferred tax asset 2,118 283
Deferred tax liabilities:
Inventory temporary differences 1,500 2,401
Unrealized currency gains 1,100 ---
Other 988 616
-------- -------
Total deferred tax liability 3,588 3,017
-------- -------
Net deferred tax liability $1,470 $2,734
======== =======
The Company's effective tax rate differs from the applicable U.S.
statutory federal income tax rate due to the following:
1993 1992 1991
---- ---- ----
Statutory rate 35% 34% 34%
Foreign source income taxed at
lower effective rates (5) (23) (18)
Foreign dividend distributions -- 10 --
Utilization of foreign NOL (1) (2) (1)
Recognition of fully reserved deferred tax debits (2) -- --
Utilization of foreign/AMT credits (4) (1) --
Favorable audit settlement (3) -- --
Amortization of goodwill -- -- 4
Other, net -- (1) 2
------- ------ ------
Effective rate 20% 17% 21%
======= ====== ======
92
95
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1993
The Company files its federal tax return on a stand-alone basis. Prior
to August 1991, the Company filed a consolidated tax return with ICN and was
subject to a tax sharing agreement. In accordance with the terms of the tax
sharing agreement, the Company was required to pay ICN for federal taxes
otherwise payable on a stand-alone basis. The federal tax sharing agreement and
consolidated federal filing terminated in August 1991 when ICN's ownership of
the Company dropped below 80 percent.
Upon leaving the consolidated group, the Company was allocated
$17,000,000 of NOLs which represents the Company's share of the consolidated
NOL carryforward at deconsolidation. The allocated NOL was utilized for book
purposes in 1991 to reduce deferred tax liabilities resulting in a reduction of
income tax expense. For tax purposes, the Company's net operating loss
carryforward at December 31, 1993, is $4,279,000. The utilization of this NOL
carryforward is limited to $540,000 per year until the year 2003.
During 1993, no U.S. income or foreign withholding taxes were provided on
the undistributed earnings of the Company's foreign subsidiaries with the
exception of the Company's Panamanian subsidiary, Alpha Pharmaceutical, since
Management intends to reinvest those amounts in the foreign
operations. Included in consolidated retained earnings at
December 31, 1993, is approximately $49,000,000 of accumulated earnings
of foreign operations that would be subject to U.S. income or foreign
withholding taxes if and when repatriated.
5. Debt:
Long-term debt consists of the following:
1993 1992
---- ----
Bank loans payable in Yugoslavian dinars due in 1994
with interest ranging from 13% to 170% .................$ 77,000 $ 90,000
Interest-free option payable in Spanish
pesetas to Spanish government, due in 1994.............. 599,000 1,483,000
Mortgage payable in Spanish pesetas, with
interest at 14.25% adjusted
annually, interest and principal
payable monthly through 2000 ................. 2,461,000 3,340,000
Bank credit lines and long-term loans
with interest at 14%-16% adjusted annually,
payable in Spanish pesetas, principal due in
installments through 1999........................ 12,221,000 14,460,000
Mortgage payable to bank in Dutch guilders
with interest at 9.4%, due in 2001................. 615,000 744,000
Bank loan payable in Mexican pesos
with a variable interest rate currently at 27%,
interest and principal payable monthly
through 1998...................................... 3,530,000 3,753,000
U.S. mortgage with interest at 8.125%, interest
and principal payable monthly through 2003......... 1,295,000 1,382,000
Industrial revenue bond, with interest at 10%,
interest and principal payable annually
through 1999..................................... 48,000 56,000
---------- ---------
20,846,000 25,308,000
Less current portion ............................... 3,866,000 4,292,000
---------- ----------
Total ................................. $16,980,000 $21,016,000
=========== ===========
93
96
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1993
Annual aggregate maturities of long-term debt, subsequent to
December 31, 1993, are as follows: 1994--$3,866,000; 1995--$3,628,000;
1996--$4,604,000; 1997- -$1,996,000; 1998--$1,084,000 and $5,668,000
thereafter.
The Spanish mortgage and bank credit lines and long-term loans totaling
$14,682,000, which approximates fair value, are collateralized by accounts
receivable totaling $3,909,000 and land and building with a net book
value totaling $11,252,000.
The mortgage payable of $615,000 in Dutch guilders is collateralized by
land and buildings with a net book value of $895,000. The fair value of this
note payable at December 31, 1993, was $736,000. The Mexican bank variable
interest rate loan payable of $3,530,000 is collateralized by fixed assets with
a net book value of $11,432,000. The U.S. mortgage of $1,295,000 is
collateralized by land and buildings with a net book value of $3,590,000. The
U.S. mortgage amount of $1,295,000 represents its fair value.
The fair value of the Company's debt is estimated based on current rates
available to the Company for debt of the same remaining maturities. The
carrying amount of all short-term and variable interest rate borrowings
approximates fair value.
Subsidiaries of the Company have short and long-term lines of credit
aggregating $17,147,000, of which $7,220,000 was outstanding at
December 31, 1993.
6. Commitments and Contingencies:
Litigation
The Company is a defendant in certain consolidated class actions pending in
the United States District Court for the Southern District of New York
entitled In re Paine Webber Securities Litigation (Case No. 86 Civ. 6776 (VLB);
In re ICN/Viratek Securities Litigation (Case No. 87 Civ. 4296 (VLB)). The
plaintiffs represent alleged classes of persons who purchased ICN, Viratek or
SPI common stock during the period January 7, 1986 to and including April
15, 1987. In their memorandum of law, dated February 4, 1994, the ICN
defendants argue that class certification may only be granted for purchasers
of ICN common stock for the period August 12, 1986 through February 20,
1987 and for purchasers of Viratek common stock for the period December
9, 1986 through February 20, 1987. The ICN defendants assert that no class
should be certified for purchasers of common stock of SPI for any period.
The plaintiffs allege that during such period the defendants made, or
aided and abetted other defendants in making, misrepresentations of material
fact and omitted to state material facts concerning the business, financial
condition and future prospects of ICN, Viratek and SPI in certain public
announcements, Paine Webber, Inc. research reports and filings with the
Commission. The alleged misstatements and omissions primarily concern
developments regarding Virazole, including the efficacy and safety of the
drug and the market for the drug. The plaintiffs allege that such
misrepresentations and omissions violate Section 10(b) of the Securities
Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder
and constitute common law fraud and misrepresentation. The plaintiffs
seek an unspecified amount of monetary damages, together with interest
thereon, and their costs and expenses incurred in the action, including
reasonable attorneys' and experts' fees. The ICN defendants moved to dismiss
the consolidated complaint in March 1988, for failure to state a claim upon
which relief may be granted and for failure to plead the allegations of fraud
and misrepresentation with sufficient particularity. In June 1991, the Court
granted the ICN defendants' motion to dismiss the Amended Consolidated
Complaint and provided the plaintiffs 30 days to replead. In July 1991,
plaintiffs filed a Third Amended Complaint which contained the same
substantive allegations as the Amended Consolidated Complaint. In September
1991, the ICN defendants moved to dismiss the Third Amended Complaint on the
same grounds as stated above, and also moved for summary judgment. On
September 18, 1992, the Court denied the ICN defendants' motion to dismiss and
for summary judgment. The ICN defendant's filed their answer on February
19, 1993. On October 20, 1993, plaintiffs informed the Court that they
had reached an agreement to settle with co- defendant Paine Webber, Inc. and
94
97
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1993
that they would submit a proposed settlement stipulation to the Court. Expert
discovery, which commenced in September 1993, is expected to conclude by the
end of April 1994. Plaintiffs' damages expert, utilizing assumptions and
methodologies that the ICN defendants' damages experts find inappropriate under
the circumstances has testified that, assuming that classes were certified for
purchasers of ICN, Viratek and SPI common stock for the entire class periods
alleged by plaintiffs, January 7, 1986 through April 15, 1987, and further
assuming that all the plaintiff's allegations were proven, potential damages
against ICN, Viratek and SPI would, in the aggregate, amount to $315,000,000.
The ICN defendants' four damages experts have testified that damages are zero.
Management believes, having extensively reviewed the issues in the above
referenced matters, that there are strong defenses and that the Company intends
to defend the litigation vigorously. While the ultimate outcome of these
lawsuits cannot be predicted with certainty and an unfavorable outcome could
have an adverse effect on the Company, at this time Management does not expect
that these matters will have a material adverse effect on the financial
position, results of operations or liquidity of the Company. All of the
Company's attorney fees and other costs of this litigation are borne by ICN
pursuant to an agreement between ICN and Viratek.
In August 1992, an action was filed in United States District Court for
the Southern District of New York, entitled Rossi v. ICN Pharmaceuticals, Inc.
(Case No. 92 Cir. 4819 (CL6)). The plaintiffs, citing theories of product
liability, negligence and strict liability in tort, alleged that birth defects
in an infant were caused by the mother's exposure to Virazoleduring pregnancy.
The case was placed on the court's "suspense calendar" pending completion of
the parties' investigation of the underlying facts. Based on such
investigation, the case was dismissed without prejudice pursuant to stipulation
by the parties in December 1993. Per the License Agreement, SPI has indemnified
Viratek and ICN for lawsuits involving the use of Virazole.
In February 1992, an action was filed in California Superior Court for
the County of Orange by Gencon Pharmaceuticals, Inc. (""Gencon"") against ICN
Canada Limited (""ICN Canada""), its parent, the Company, and ICN alleging
breach of contract and related claims arising out of a manufacturing contract
between Gencon and ICN Canada. ICN and the Company were dismissed from the
action in March 1993 based on the Company's agreement to guarantee any
judgment against ICN Canada. Following trial in October and November 1993, the
judge signed a decision granting judgment in favor of Gencon for breach of
contract in the amount of approximately $2,100,000 plus interest, costs and
attorney's fees. Trial counsel has advised the Company that the decision
contains serious errors of law and fact. ICN Canada intends to prosecute
vigorously its post-trial motions and any necessary appeal. The Company's
December 31, 1993 financial statements includes an accrual amount equivalent to
what the Company believes is the maximum exposure with regard to this
contingency.
The Company is a party to a number of other pending or threatened
lawsuits arising out of, or incident to, its ordinary course of business. In
the opinion of Management, neither the lawsuits discussed above nor various
other pending lawsuits will have a material adverse effect on the consolidated
financial position or operations of the Company.
95
98
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1993
Product Liability Insurance
The Company could be exposed to possible claims for personal injury
resulting from allegedly defective products. While to date no material adverse
claim for personal injury resulting from allegedly defective products has been
successfully maintained against the Company, a substantial claim, if successful,
could have a material adverse effect on the Company.
7. COMMON STOCK:
At December 31, 1993, 1,369 shares of common stock were reserved for
issuance to officers, directors and key employees under the Company's 1982
Employee Incentive Stock Option Plan. The option price may not be less than
fair market value at date of grant and may not have a term exceeding 10 years.
At December 31, 1993, options for 1,369 shares were outstanding under this plan
(at a price of $4.84 per share), of which 1,369 shares were exercisable. No
shares were exercised during 1993. The number of shares exercised were: 1992 -
2,322 and 1991 -7,000 at average prices of $5.16 and $5.27, respectively.
In addition, at December 31, 1993, a total of 856,232 shares of common
stock were reserved for issuance to officers, directors, key employees,
scientific advisors and consultants under the Company's 1982 Non-Qualified Stock
Option Plan. The option price may not be less than fair market value at date of
grant and may not have a term exceeding 10 years. At December 31, 1993, options
for 856,232 shares were outstanding under this plan (at an average price of
$11.59), of which 456,887 shares were exercisable. The number of shares
exercised were: 1993--180,446; 1992--229,153; 1991--587,000, at average prices
of $5.10, $7.16, and $5.16, respectively.
At December 31, 1993, 541,292 shares of common stock were reserved for
issuance to officers, directors and key employees under the Company's 1992
Employee Incentive Stock Option Plan. The option price may not be less than
fair market value at date of grant and may not have a term exceeding 10 years.
At December 1993, 505,838 shares were outstanding under this plan (at an average
price of $16.78 per share), of which 89,899 shares were exercisable.
In addition, at December 31, 1993, a total of 1,483,007 shares of common
stock had been granted to officers, directors, key employees, scientific
advisors and consultants under the Company's 1992 Non-Qualified Stock Option
Plan. The option price per share may not be less than the fair value at date of
grant and may not have a term exceeding 10 years. Of these shares, a total of
1,082, 586 shares were reserved and outstanding under this plan and 400,421
shares were not reserved and outstanding under this plan at the time of grant,
but were granted to key employees pursuant to authorization by the Board of
Directors, subject to the approval of the shareholders at the next meeting of
shareholders' to be held in 1994. At December 31, 1993, the average price per
share of the shares granted was $21 and 551,438 options were exercisable.
In addition to those shares reserved for the above noted plans, 342,422
shares were reserved for certain officers of the Company. At December 31, 1993,
options for 62,290 were outstanding and exercisable at an average price of
$4.84. The number of shares exercised were: 1993--280,132 and 1992--102,000,
at an average price of $4.84 and $5.13, respectively.
On January 13, 1993, the Company's Board of Directors approved a fourth
quarter 1992 stock dividend of 2%. During 1993, the Company issued quarterly
stock dividends which totaled 6%. In January, 1994, the Company declared a
first quarter 1994 stock dividend of 1.4%. Accordingly, all numbers of common
shares, except shares authorized, stock option data and per share data have been
restated to reflect the dividends. Fractional shares resulting from the
dividends will be settled in cash.
96
99
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1993
8. DETAIL OF CERTAIN ACCOUNTS:
1993 1992
------------ ------------
RECEIVABLES, NET:
Trade accounts receivable.................. $ 47,956,000 $ 81,331,000
Other receivables.......................... 2,954,000 6,889,000
------------ ------------
50,910,000 88,220,000
Allowance for doutbful accounts............ (7,633,000) (10,188,000)
------------ ------------
$ 43,277,000 $ 78,032,000
============ ============
INVENTORIES, NET:
Raw materials and supplies................. $ 57,148,000 $ 27,297,000
Work-in-process............................ 12,541,000 11,284,000
Finished goods............................. 37,507,000 52,528,000
------------ ------------
$107,196,000 $ 91,109,000
============ ============
PROPERTY, PLANT AND EQUIPMENT: 1993 1992
------------ ------------
Land....................................... $ 4,891,000 $ 5,392,000
Buildings.................................. 46,477,000 47,955,000
Machinery and equipment.................... 44,385,000 41,521,000
Furniture and fixtures..................... 7,403,000 6,995,000
Leasehold improvements..................... 1,269,000 1,127,000
Construction in progress................... 4,490,000 3,052,000
------------ ------------
108,915,000 106,042,000
Accumulated depreciation and amortization.. (30,197,000) (24,548,000)
------------ ------------
$ 78,718,000 $ 81,494,000
============ ============
OTHER ASSETS:
Prepaid royalties.......................... $ 6,395,000 $ 6,883,000
Patents and trademarks, net of accumulated
amortization............................. 2,346,000 2,139,000
Other...................................... 4,132,000 4,727,000
------------ ------------
$ 12,873,000 $ 13,749,000
============ ============
ACCRUED LIABILITIES:
Payroll and related items.................. $ 8,278,000 $ 9,045,000
Professional fees.......................... 387,000 758,000
Royalties.................................. 810,000 828,000
Interest................................... 111,000 1,935,000
Taxes...................................... 139,000 1,786,000
Other...................................... 7,975,000 9,229,000
------------ ------------
$ 17,700,000 $ 23,581,000
============ ============
OTHER LIABILITIES AND DEFERRED INCOME TAXES:
Deferred income taxes...................... $ 1,470,000 $ 2,734,000
Redundancy cost............................ --- 4,854,000
Accrued litigation settlements and damages 988,000 ---
Other...................................... 3,768,000 2,653,000
------------ ------------
$ 6,226,000 $ 10,241,000
============ ============
97
100
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
1993 1992 1991
---- ----
INTEREST:
Interest (income)................. $(5,983,000) $(6,599,000) $ (41,000)
Interest (income) -- affiliates... (2,050,000) (3,080,000) (3,637,000)
----------- ----------- -----------
$(8,033,000) $(9,679,000) $(3,678,000)
=========== =========== ===========
Interest expense.................. $20,900,000 $ 8,790,000 $ 7,814,000
Interest expense--affiliates...... 2,850,000 4,275,000 1,151,000
----------- ----------- -----------
$23,750,000 $13,065,000 $ 8,965,000
=========== =========== ===========
It is the Company's policy to segregate significant non-operating items
and report them separately as Other expense, net, as follows:
<Caption
Litigation settlements and damages... $ 988,000 $ 447,000 $ 621,000
Profit sharing plan expense in Mexico 557,000 419,000 222,000
Amortization of goodwill............. 248,000 677,000 818,000
Employee severance in Spain.......... 1,000,000 --- ---
Write-down and other costs for domestic
Nutritional Group............... --- --- 10,878,000
(Gain) loss on sale of fixed assets.. (194,000) 151,000 (356,000)
Write-off of prepaid royalties....... --- --- 1,503,000
Facility relocation expenses in Spain --- --- 2,198,000
Unrealized loss on marketable securities 1,312,000 --- ---
Other, net........................... (85,000) 388,000 873,000
----------- ----------- -----------
$ 3,826,000 $ 2,082,000 $16,757,000
=========== =========== ===========
98
101
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
9. GEOGRAPHIC DATA:
The Company operates in the pharmaceutical industry, which includes the
production and marketing of proprietary pharmaceutical products, nutritional
supplements and optical products.
The following tables set forth the amounts of net sales, income before
provision for income taxes and minority interest and identifiable assets of the
Company by geographical areas for 1993, 1992 and 1991 (in thousands):
SALES
1993 1992 1991
---- ---- ----
United States(1)............. $ 62,008 $ 53,102 $ 51,543
Yugoslavia................... 239,832 325,903 224,782
Mexico....................... 57,782 48,654 41,691
Western Europe............... 30,601 34,290 31,353
Canada....................... 13,734 14,169 14,989
--------- --------- ---------
Total................. $ 403,957 $ 476,118 $ 364,358
========= ========= =========
INCOME (LOSS) BEFORE INTEREST, PROVISION FOR INCOME TAXES AND MINORITY INTEREST.
United States............... $ 25,756 $ 17,593 $ 3,045 (2)
Yugoslavia.................. 11,828 37,692 57,190
Mexico...................... 7,371 3,772 1,249 (3)
Western Europe.............. 4,079 3,871 513 (4)
Canada...................... 851 1,869 1,427
Corporate(5)................ (7,101) (8,205) (5,294)
--------- --------- ---------
Income before interest,
provision for income taxes
and minority interest.. 42,784 56,592 58,130
Net interest expense..... 15,717 3,386 5,287
--------- --------- ---------
Income before provision
for income taxes and
minority interest...... $ 27,067 $ 53,206 $ 52,843
IDENTIFIABLE ASSETS:
United States............... $ 38,764 $ 34,775 $ 44,203
Yugoslavia.................. 180,055 215,282 217,330
Mexico...................... 33,874 32,085 21,535
Western Europe.............. 33,284 40,719 45,519
Canada...................... 6,155 6,818 8,318
Corporate................... 9,885 3,539 ---
--------- --------- ---------
Total.................... $ 302,017 $ 333,218 $ 336,905
During the year ended December 31, 1993, approximately 68% of ICN
Galenika's sales were to the Federal Republic of Yugoslavia or government
sponsored entities. At December 31, 1993, there were no significant receivables
from the Yugoslavian government, however future sales of ICN Galenika could be
dependent on the ability of the Yugoslavian government to generate cash to
purchase pharmaceuticals and the continuation of its current policy to buy
products from ICN Galenika. No other customer accounts for more than 10% of the
Company's net sales.
(1) Export sales shipped from the United States for 1993, 1992 and 1991 were
$6,166,000, $4,824,000, and $3,576,000, respectively.
99
102
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
(2) During 1991, the Company wrote off goodwill, inventory and other assets
totaling $13,124,000, of which $10,878,000 relates to the domestic
nutritional group.
(3) During 1991, the Mexico subsidiary wrote off $909,000 of inventory.
(4) During 1991, the Western European group wrote off $1,051,000 in
inventory and receivables.
(5) Corporate includes corporate general and administrative expenses and
other non-operating income and expense. Corporate identifiable assets
are not determinable for 1991.
10. SUPPLEMENTAL CASH FLOWS DISCLOSURES:
Non-cash Transactions
In September 1993, the Company issued 200,000 shares of common stock to
ICN in exchange for reducing its debt outstanding to ICN by $3,075,000.
During 1993 and 1992, the Company issued common stock dividends of
$20,634,000 and $3,440,000, respectively.
Cash and non-cash financing activities consisted of the following in 1991
(in thousands):
ICN GALENIKA
Assets............................... $162,581
Liabilities and minority interest.... (104,280)
--------
58,301
Stock contributed by ICN............. (11,555)
Obligation to ICN Galenika........... (13,550)
Fees and expenses.................... (3,000)
Issuance of stock to employees....... (9,000)
Other consideration.................. (6,743)
--------
Cash paid.................... $ 14,453
========
The following table sets forth the amounts of interest and income taxes paid
during 1993, 1992 and 1991 (in thousands):
1993 1992 1991
---- ---- ----
Interest paid............. $ 11,203 $ 5,565 $ 6,729
========= ======== ========
Income taxes paid......... $ 3,156 $ 1,730 $ 2,324
========= ======== ========
11. ACQUISITION:
Effective May 1, 1991, SPI formed a new joint company with Galenika
Pharmaceuticals headquartered in Belgrade, Yugoslavia. The joint company, ICN
Galenika, is 75%-owned by the Company and 25%-owned by Galenika Holding
("Galenika Holding"). Galenika, the leading pharmaceutical company in
Yugoslavia, produces, markets and distributes over 450 pharmaceutical,
veterinary, dental and other products in Yugoslavia, Eastern Europe and Russia.
100
103
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
In connection with the agreement, the Company contributed assets totaling
$58,301,000, consisting of $14,453,000 cash, an obligation to pay
$13,550,000 and 1,200,000 unregistered shares of common stock of the Company
issued to the employees ("owners" in Socialist Yugoslavia) of Galenika Holding
with a fair value of $9,000,000. On December 31, 1991, ICN, on behalf of SPI,
contributed: 1,468,000 shares of SPI common stock to ICN Galenika with a cost
basis of $11,555,000; the minority interest share of the excess of the fair
value of the common stock of the Company contributed by ICN and ICN's cost
basis equaling $6,743,000; and acquisition costs of $3,000,000. Under the
terms of the ICN Galenika agreement, SPI had an obligation to contribute, in
part, $50,000,000 in cash and either 1,200,000 shares of SPI stock or
$12,000,000 in cash. However, the agreement was subsequently changed in
December 1991 whereby ICN, on behalf of SPI, contributed shares of SPI stock in
lieu of the $40,000,000 (after a cash payment of $10,000,000) and SPI issued
1,200,000 shares of SPI stock in lieu of cash, to comply with the original
intent of the parties.
The ICN Galenika transaction has been accounted for by the purchase
method of accounting, and accordingly, the Company's investment has been
allocated, based on the Company's ownership percentage, to the assets acquired
and the liabilities assumed based on the estimated fair values at the effective
date of formation, May 1, 1991. Assuming that the acquisition of ICN
Galenika occurred at the beginning of the year, the Company's 1991 pro forma
revenues for the full year ended December 31, 1991, would have been
$452,460,000 with net income of $44,096,000. The pro forma information
presented does not purport to be indicative of the results that would have
been obtained if the operations were combined during the year presented and is
not intended to be a projection of future results or trends.
In connection with the ICN Galenika transaction, the Company changed its
fiscal year end from November 30 to December 31, which conforms to ICN
Galenika's year end. The Company's separate results of operation for the month
of December 1990, therefore, are not reflected in the statement of income but
have been charged directly to retained earnings.
12. ICN GALENIKA:
The summary balance sheets of ICN Galenika as of December 31, 1993 and
1992, and the summary income statements for the years ended December 31,
1993, 1992 and the eight months ended December 31, 1991, are presented below.
ICN GALENIKA SUMMARY BALANCE SHEETS
AS OF DECEMBER 31, 1993 AND 1992
(IN THOUSANDS)
1993 1992
Cash.................................................................. $ 7,542 $ 34,787
Restricted cash....................................................... --- 15,200
Marketable securities (used to collateralize $10,000,000 note payable) 32,587 ---
Receivables, net...................................................... 7,650 41,549
Inventories, net...................................................... 88,392 74,033
Other current assets.................................................. 21,120 25,305
Long-term assets...................................................... 38,264 39,202
-------- --------
$195,555 $230,076
======== ========
Current liabilities $ 18,400 $ 41,258
Non-current liabilities............................................... 40,802 53,034
Stockholders' Equity.................................................. 136,353 135,784
-------- --------
$195,555 $230,076
======== ========
101
104
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
ICN GALENIKA SUMMARY STATEMENTS OF INCOME BEFORE PROVISION FOR INCOME TAXES AND
MINORITY INTEREST FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND EIGHT MONTHS
ENDED DECEMBER 31, 1991
(IN THOUSANDS)
1993 1992 1991
Sales............................................................. $239,832 $325,903 $224,782
Cost of sales..................................................... 156,189 151,918 118,456
-------- -------- --------
Gross profit...................................................... 83,643 173,985 106,326
Operating expenses................................................ 83,160 107,504 49,134
Translation and exchange losses, net.............................. 173 27,963 6,434
-------- -------- --------
Income before provision for income taxes and minority interest.... $ 310 $ 38,518 $ 50,758
======== ======== ========
SANCTIONS:
A substantial majority of ICN Galenika's business is conducted in the
Federal Republic of Yugoslavia (Serbia and Montenegro). On May 30, 1992, the
UNSC adopted a resolution that imposed economic sanctions on the Federal
Republic of Yugoslavia and on April 17, 1993, the UNSC adopted a
resolution that imposed additional economic sanctions on the Federal Republic
of Yugoslavia. On April 26, 1993, the United States issued an executive order
that implemented the additional sanctions pursuant to the United Nations
resolution. The new sanctions continue to specifically exempt certain
medical supplies for humanitarian purposes, a portion of which are distributed
by ICN Galenika.
ICN Galenika continues to apply for, and has received, licenses
under the new sanctions. The renewed efforts to enforce sanctions will
create additional administrative burdens that will slow the shipments of
licensed raw materials to Yugoslavia. Shipments of imported raw materials
declined in 1993 to 38% of prior year levels. Additionally, the new
sanctions have contributed to an overall deteriorating business environment
in which ICN Galenika must operate.
The new sanctions provide for the freezing of bank accounts of
Yugoslavian commercial and industrial entities. The implementation of new
sanctions may create a restriction on ICN Galenika's cash holdings that are
maintained in a bank outside of Yugoslavia. Management believes, however,
that these funds will be available for drawdowns on lines of credit for
shipments specifically licensed under the new and prior sanctions. As a
result of continuing political and economic instability within Yugoslavia,
including the long-term impact of the sanctions, wage and price controls, and
devaluations, there may be further limits on the availability of hard and
local currency and consequently, an adverse impact on the future operating
results of the Company.
At December 31, 1992, ICN Galenika had cash and cash equivalents of
$44,700,000, of which $15,200,000 was restricted as to use, invested with a
financial institution outside of Yugoslavia. These funds have been used for
letters of guarantee on ICN Galenika's raw material purchases and to
collateralize the payment of dividends. During the first quarter 1993,
$731,000 was withdrawn under the letters of guarantee. Before the
implementation of additional sanctions in April 1993, approximately
$9,885,000 was withdrawn under the letters of guarantee. In October
1993, ICN Galenika acquired marketable securities with these funds in
order to maximize their interest earned. The marketable securities are
maintained at the same financial institution. As of December 31, 1993, at
this institution, ICN Galenika had $834,000 of hard currency and
$32,587,000 of marketable securities which are used to collateralize a
$10,000,000 note payable.
102
105
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
In order to conserve operating cash, the wages of all ICN Galenika
employees were reduced to Yugoslavian minimum wage levels beginning in the
fourth quarter 1993. To help alleviate the burden of sanctions and wage
reductions, the Company intends to expend funds for humanitarian aid in the
form of food assistance for ICN Galenika employees. This aid will be
subject to approval and licensing required by UNSC sanctions. In the first
quarter 1994, the Company obtained licenses for approximately $280,000
of aid. The expenditure of future aid will be dependent on the conditions in
Yugoslavia and will be subject to obtaining approval and licenses under UNSC
sanctions.
HYPERINFLATION AND PRICE CONTROLS:
Under existing Yugoslavian price controls imposed in July 1992, ICN
Galenika can no longer continue the unrestricted practice of increasing selling
prices in anticipation of inflation. Rather, price increases must be approved
by the government prior to implementation. The imposition of price controls
along with the effect of sanctions and recurring currency devaluations
resulted in reduced sales levels in the last half of 1992 and for 1993.
This trend of reduced sales levels is expected to continue as long as
sanctions are in place.
As a result of decreased sales levels, Management expects that profit
margins will decrease and overall operating expenses as a percentage of
sales will increase.
As a result of the hyperinflation in Yugoslavia, the Yugoslavian
government devalued the dinar on several occasions during 1993 and, on October
1, 1993, changed the denomination of the currency. The effect of
the devaluations, adjusted for the change in currency denomination, was to
increase the exchange rate from less than one dinar per $1 U.S. at the
beginning of 1993 to over one trillion dinars per $1 U.S. at the end of 1993.
In anticipation of devaluations in 1993, the Company implemented a plan
described below, to minimize its monetary exposure. As a result of the
devaluations and subsequent exchange losses from obtaining hard
currencies, ICN Galenika experienced translation losses of $173,000.
While the Company cannot predict with any certainty the actual
remeasurement and exchange gains or losses that may occur in 1994, such
amounts may be substantial. Annual inflation is very high with some estimates
of over 1 billion percent. Future devaluations are likely in the near term.
At December 31, 1993, ICN Galenika's net monetary liability exposure was
$2,093,000. As a result of the non-tradability of the dinar, the Company is
unable to effectively hedge against the loss from devaluation.
The Company is taking action to generate the dinar cash needed to
acquire hard currency to reduce its monetary exposure. ICN Galenika has access
to short- term borrowings at interest rates below the level of inflation.
ICN Galenika plans to maximize its borrowings under these arrangements and
use the proceeds to acquire hard currency for the purchase of inventory.
This strategy will provide hard currency, accelerate the purchase of
inventory to minimize the effects of inflation, and reduce future
transaction losses. This strategy will also increase ICN Galenika's monetary
liabilities, and lower its risk of loss from devaluations. This strategy,
however, has resulted in increased interest expense in 1993 and may result in
high levels of interest expense in 1994.
In conjunction with a currency devaluation on July 23, 1993, the
Yugoslavian government announced that businesses in Yugoslavia can no longer
buy and sell hard currency in privately negotiated transactions. All
purchases of hard currency must be made through the National Bank of
Yugoslavia based on government approved allocations. This action could
possibly limit the availability of hard currency in the future for ICN
Galenika. However, if the government is successful in controlling access to
hard currency, the Company's operations in Yugoslavia may benefit through
increased allocations of hard currency. Due to the strategic nature of
pharmaceutical drugs in Yugoslavia, ICN Galenika has, in the past, received
relatively favorable allocations of hard currency from the government.
For the year ended December 31, 1993, ICN Galenika received $12,744,000 in
currency allocations.
103
106
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
On January 24, 1994, the Yugoslavian government enacted a
"Stabilization Program" designed to strengthen its currency. Under this program
the official exchange rate of the dinar is fixed at a ratio of one dinar to one
Duetsche mark. The Yugoslavian government guarantees the conversion of dinars
to Duetsche marks and is able to do so by exercising restraint in the amount of
dinars that it prints. Since the inception of this program the exchange rate of
dinars to Duetsche marks has remained stable. The impact of this change on the
future operations of ICN Galenika is uncertain.
As required by GAAP, the Company translates ICN Galenika financial
results at the dividend payment rate established by the National Bank of
Yugoslavia. To the extent that changes in this rate lag behind the level of
inflation, sales and expenses will, at times, tend to be inflated. Future sales
and expenses can substantially increase if the timing of future devaluations
falls significantly behind the level of inflation. While the impact of
sanctions, price controls, and devaluations on future sales and net income
cannot be determined with certainty, they may, under the present political and
economic environment, result in an adverse impact in the future.
At December 31, 1993, ICN Galenika has U.S. $33,421,000 invested with a
financial institution outside of Yugoslavia. These funds came from the initial
cash investment made by the Company of $14,453,000 and from the sale of the
Company's stock transferred to ICN Galenika by ICN, also in conjunction with
the acquisition. Under the terms of the acquisition agreement, these funds
were originally intended to finance business expansion. However, in light of
the current economic conditions in Yugoslavia, these funds are used for letters
of guarantee on ICN Galenika's raw material purchases and to collateralize the
payment of dividends. These funds are encumbered by a letter of guarantee for
raw material purchases, of which no amount was outstanding at December 31,
1993, and $5,200,000 was outstanding at December 31, 1992, and as collateral
for $10,000,000 of loans, included in Notes Payable bearing interest at 4.5%
that were issued to pay the 1992 dividend of the same amount. Other uses of
these funds in the future, such as capital investment, additional letters of
guarantee, or future dividends are subject to review and licensing under the
UNSC sanctions. At December 31, 1993, these funds have been invested in bonds
and are recorded as marketable securities which are used to collateralize a
$10,000,000 notes payable. At December 31, 1992, these funds were included in
cash with $15,200,000 reflected as restricted cash.
As noted above, ICN Galenika paid a $10,000,000 dividend in 1992 of
which the Company received 75% or $7,500,000. Yugoslavian law allows free
distribution of earnings whether to domestic (Yugoslavian) or international
investors. ICN Galenika is allowed to pay dividends out of earnings calculated
under Yugoslavian Accounting Practices ("YAP"), not earnings calculated under
GAAP.
As a result of the current level of inflation, the accumulated YAP
earnings of ICN Galenika are insignificant when stated in dollars. Future
dividends from ICN Galenika will depend heavily on future earnings. Under
GAAP, ICN Galenika had accumulated earnings, which are not available for
distributions, of approximately $61,787,000 at December 31, 1993. However,
additional repatriation of cash could be declared from contributed capital as
provided for in the original purchase agreement. In 1992, the Company made the
decision to no longer repatriate the earnings of ICN Galenika and instead will
use these earnings for local operations and reduction of debt.
The current political and economic conditions in Yugoslavia could
continue to deteriorate to the point that the Company's investment in ICN
Galenika would be threatened. Worsening political and economic conditions could
also result in a situation where the Company may be unable to exercise control
over ICN Galenika's operations or be unable to receive dividends from ICN
Galenika. Under these conditions, the Company would no longer be able to
continue to consolidate the financial information of ICN Galenika. In this
situation the Company would be required to deconsolidate ICN Galenika and
account for its investment using the cost method of accounting and the
investment in ICN Galenika would be carried at the lower of cost or realizable
value.
104
107
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
13. CONCENTRATIONS OF CREDIT RISK:
Financial instruments that potentially expose the Company to
concentrations of credit risk, as defined by SFAS No. 105, consist primarily
of cash deposits. The Company places its cash deposits with respected
financial institutions and limits the amount of credit exposure to any one
financial institution, however, in connection with the acquisition of ICN
Galenika, the cash contributed to ICN Galenika was required, under the terms of
the agreement, to be placed on deposit in a single high credit quality
financial institution outside of Yugoslavia. At December 31, 1993, ICN
Galenika had hard currency of $834,000 and marketable securities of
$32,587,000 on deposit with this financial institution.
14. INVESTMENT IN RUSSIA
On October 21, 1992, the Company announced that it had concluded an
agreement with the Leningrad Industrial Chemical and Pharmaceutical
Association (""Oktyabr"") to form a pharmaceutical joint venture in Russia, ICN
Oktyabr, in which the Company will have a 75% interest. The new joint
venture was registered with the Russian Federation on March 9, 1993. The
joint venture represents a new business, and not the acquisition of the
existing business or assets of Oktyabr. Business operations of the joint
venture will commence on the completion of a business plan. Oktyabr, which
recently was privatized, will contribute output from its current
production facilities. The Company's contribution will be management
expertise, technology, equipment, intellectual property, training and
technical assistance to the new joint venture. Because of the transition of
the Russian economy into a free market oriented economy, the Company plans
for a gradual phase-in of the joint venture in 1994 and 1995. During this
phase-in period, the joint venture will develop training and marketing
strategies and begin constructing a new manufacturing facility in 1995
that is scheduled to be fully operational in 1996. Because of this phase-in
period, the Company does not expect any current material effects on it
operating results, as well as, its capital resources and liquidity.
15. SUBSEQUENT EVENT
In addition to the joint venture in Russia, on March 24, 1994, SPI
entered into an Agreement with the City of St. Petersburg to acquire 15% of the
outstanding shares of its joint venture partner, Oktyabr, in exchange for
approximately 30,000 shares of the Company's stock. As part of this Agreement,
SPI may qualify to receive newly issued shares of Oktyabr pursuant to Russian
privatization regulations that will raise its total investment in Oktyabr to
43%. The issuance of these additional shares is subject to approval and
completion of an "investment plan." The completion of the investment plan will
not require any additional financial resources of the Company. The Company
has also extended an offer to the employees of Oktyabr to exchange their
Oktyabr shares for SPI shares. The Oktyabr employees currently own
approximately 33% of the outstanding shares, however, the number of employees
that will exchange their shares is uncertain. In the event that SPI qualifies
under the investment plan to raise its investment to 43%, it is possible that a
sufficient number of employees might exchange their Oktyabr shares for SPI
shares so that the total SPI investment in Oktyabr would exceed 50%. If this
event occurs, the Company would be required to consolidate the financial
results of Oktyabr into the financial statements of the Company.
105
108
SPI PHARMACUETICALS, INC.
SCHEDULE I--MARKETABLE SECURITIES
AMOUNT AT
WHICH EACH
PORTFOLOI OF
NUMBER OF EQUITY SECURITY
SHARES OR UNITS ISSUES AND
- PRINICPAL MARKET VALUE EACH OTHER
AMOUNT OF OF EACH ISSUE SECURITY ISSUE
NAME OF ISSUER AND TITLE OF EACH BONDS AND COST OF EACH AT BALANCE CARRIED IN THE
ISSUE NOTES ISSUE SHEET DATE BALANCE SHEET
- -------------------------------- -------------- ------------ ------------- ---------------
As of December 31, 1993:
6-5/8% Phillip Morris
Capital Corp. 77,000 $105.60 $102.63 $ 7,902,000
6-1/8% Tokyo Electric Power 100,000 102.60 98.63 9,862,000
6-1/4% British Gas International 90,000 103.55 98.88 8,899,000
3-1/2% Roche Holdings Inc. 70,000 88.38 84.63 5,924,000
----------
Total Marketable Securities $32,587,000
===========
As of December 31, 1992:
None
106
109
SPI PHARMACUETICALS, INC.
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO (CREDITED) DEDUCTIONS BALANCE
BEGINNING COSTS AND TO OTHER FROM AT END
OF PERIOD EXPENSES ACCOUNTS RESERVES OF PERIOD
------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1993:
Allowance for doubtful receivables $10,188 $ 11,261 $(13,664)(1) $ 152 $ 7,633
============================================================================
Reserve for inventory obsolescence $ 3,671 $ 1,281 $ (532) $ 3,103 $ 1,317
============================================================================
YEAR ENDED DECEMBER 31, 1992:
Allowance for doubtful receivables $21,566 $ 48,312 $(59,569)(1) $ 121 $ 10,188
============================================================================
Reserve for inventory obsolescence $ 3,280 $ 2,456 $ (19) $ 2,046 $ 3,671
============================================================================
YEAR ENDED DECEMBER 31, 1991:
Allowance for doubtful receivables $ 2,304 $ 6,812 $ 13,165(2) $ 715 $ 21,566
============================================================================
Reserve for inventory obsolescence $ 2,351 $ 2,683 $ 18 $ 1,772 $ 3,280
============================================================================
(1) The credit to other accounts is primarily due to the impact
of devaluations on the outstanding allowance for doubtful
accounts. In hyperinflationary countries such as Yugoslavia, a
devaluation will result in a reduction of accounts receivable and a
proportionate reduction in the accounts receivable allowance. The
reduction of accounts receivable is recorded as a foreign currency
translation loss and the reduction of the allowance is recorded as a
translation gain. Shortly after a devaluation the level of accounts
receivable will rise as a result of subsequent price increases. In
conjunction with the rise in receivables, additions to the allowance
for receivables will be made for existing doubtful accounts. This
process will repeat itself for each devaluation that occurs during the
year. The effect of this process results in a high level of bad debt
expense that does not necessarily reflect credit risk or difficulties
in collecting receivables. For the year ended 1993, ICN Galenika
recorded provisions for doubtful accounts of $10,968,000 compared to
$48,279,000 for 1992. The timing of devaluations has a material
impact on the size of the provision for doubtful accounts. The
decrease in the 1993 provision is primarily a result of devaluations
occurring more frequently in the current year, smaller price increases
in 1993 compared to 1992, and lower levels of accounts receivable
compared to the prior year. The reduction of the accounts receivable
allowance from devaluation resulted in a translation gain of
$9,118,000 and $40,191,000 resulting in a net expense from bad debts
and bad debt translation gain of $1,850,000 and $8,088,000 for 1993
and 1992, respectively.
(2) Results principally from ICN Galenika purchase price allocation.
107
110
SPI PHARMACEUTICALS, INC.
SCHEDULE IX--SHORT-TERM BORROWINGS
(In thousands)
WEIGHTED
MAXIMUM AVERAGE AVERAGE
WEIGHTED AMOUNT AMOUNT INTEREST
BALANCE AT AVERAGE OUTSTANDING OUTSTANDING RATE
END OF INTEREST DURING THE DURING DURING THE
PERIOD RATE PERIOD THE PERIOD(1) PERIOD(3)
---------------------------------------------------------------------------
Year ended December 31, 1993:
Notes payable to banks $14,360 9% $19,566 $14,464 118%(3)
===========================================================================
Year ended December 31, 1992:
Notes payable to banks $16,322 28% $16,322 $ 9,067 71%(3)
===========================================================================
Year ended December 31, 1991:
Notes payable to banks $12,157 50% $16,809 $10,907 63%(3)
===========================================================================
(1) Calculated by dividing the total month-end outstanding borrowings
by 12 months.
(2) Calculated by dividing the total interest accrued during the period
on short-term borrowings by the monthly average short-term borrowings
outstanding during the period.
(3) Weighted average interest rates were heavily influenced by the
magnitude and duration of local currency borrowings in highly
inflationary Yugoslavia, where interest rates obtained on borrowings
usually reflect the underlying levels of local inflation.
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111
SPI PHARMACEUTICALS, INC.
SCHEDULE X--SUPPLEMENTARY INCOME STATEMENT INFORMATION
(IN THOUSANDS)
1993 1992 1991
------ ------ ------
Advertising........................ $ 13,039 $ 12,211 $ 11,150
========= ========= =========
Royalties(1)....................... $ 2,401 $ 1,093 $ 3,274
========= ========= =========
Amortization of intangible assets.. $ 443 $ 904 $ 1,968
========= ========= =========
Repairs and maintenance............ $ 4,654 $ 6,806 $ 3,621
========= ========= =========
(1) These amounts do not include royalties to affiliates, which
are separately disclosed in Note 3 of Notes to Consolidated
Financial Statements.
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112
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item is incorporated by
reference to the Company's definitive Proxy Statement to be filed
in connection with the Company's 1994 annual meeting of
stockholders. Reference is made to that portion of the Proxy
Statement entitled "Information Concerning Nominees and
Directors." Information regarding the Company's executive
officers is included in Part I of this Form 10-K under the
caption "Management."
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated by
reference to the Company's definitive Proxy Statement to be filed
in connection with the Company's 1994 annual meeting of
stockholders. Reference is made to that portion of the Proxy
Statement entitled "Executive Compensation and Related Matters."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required under this item is incorporated by
reference to the Company's definitive Proxy Statement to be filed
in connection with the Company's 1994 annual meeting of
stockholders. Reference is made to that portion of the Proxy
Statement entitled "Ownership of the Company's Securities."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated by
reference to the Company's definitive Proxy Statement to be filed
in connection with the Company's 1994 annual meeting of
stockholders. Reference is made to those portions of the Proxy
Statement entitled "Executive Compensation and Related Matters"
and "Certain Transactions."
110
113
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements
Financial Statements of the Registrant are listed in the
index to Consolidated Financial Statements and filed under Item
8, "Financial Statements and Supplementary Data", included
elsewhere in this Form 10-K.
2. Financial Statement Schedules
Financial Statement Schedules of the Registrant are listed
in the index to Consolidated Financial Statements and filed under
Item 8, "Financial Statements and Supplementary Data," included
elsewhere in this Form 10-K.
3. Exhibits
3.1 Certificate of Incorporation of Registrant, previously
filed as Exhibit 3.1 to Registrant's Annual Report on Form
10-K for the fiscal year ended November 30, 1987, which is
incorporated herein by reference.
3.2 Bylaws of Registrant, previously filed as Exhibit 3.2 to
Registrant's Annual Report on Form 10-K for the fiscal
year ended November 30, 1987, which is incorporated herein
by reference.
4.2 Indenture between ICN Pharmaceuticals, Inc. and J. Henry
Schroeder Bank & Trust Company, previously filed as
Exhibit 4.1 to Registration Statement No. 33-5919 on Form
S-3, which is incorporated herein by reference. First
Supplemental Indenture dated as of October 1, 1986,
between ICN Pharmaceuticals, Inc. and J. Henry Schroeder
Bank & Trust Company.
111
114
10.1 1981 Employee Incentive Stock Option Plan, previously
filed as Exhibit 10.1 to Registrant's Annual Report on
Form 10-K for the fiscal year ended November 30, 1981,
which is incorporated herein by reference.
112
115
10.2 Non-Qualified Stock Option Agreement dated as of May 24,
1984, between ICN Pharmaceuticals, Inc. and Milan Panic,
previously filed as Exhibit 10.20 to Registrant's Annual
Report on Form 10-K for the fiscal year ended November 30,
1984, which is incorporated herein by reference.
10.3 Public Bond Issue Agreement dated as of June 13, 1985
between ICN Pharmaceuticals, Inc. and Banque Gutzwiller,
Kurz, Bungener S.A., previously filed as Exhibit 10 to
Registrant's Form 8 Amendment of Quarterly Report on Form
10-Q for the quarter ended August 31, 1985, which is
incorporated herein by reference.
113
116
10.4 Subscription Agreement dated January 20, 1986 between the
Company, SPI Pharmaceuticals, Inc., Banque Gutzwiller,
Kurz, Bungener, S.A. and the Trustee and Banks named
therein, previously filed as Exhibit 10.33 to Amendment
No. 1 to Annual Report on Form 10-K for the fiscal year
ended November 30, 1985, which is incorporated herein by
reference.
10.5 Purchase Agreement dated as of September 5, 1986, for an
issue by ICN Pharmaceuticals, Inc. of Dfl. 75,000,000
Subordinated Convertible Bonds due 1990/1994 convertible
into Shares of Common Stock, between ICN Pharmaceuticals,
Inc. and Van Haften & Co. N.V. and the other Managers
named therein; Trust Deed dated as of September 15, 1986,
between ICN Pharmaceuticals, Inc. and B.V. Algemeen
Administratieen Trustkantoor; and Paying Agency Agreement
dated as of September 15, 1986, for an issue by ICN
Pharmaceuticals, Inc. of Dfl. 75,000,000 Subordinated
Convertible Bonds due 1990/1994 Convertible into Shares of
Common Stock among ICN Pharmaceuticals, Inc., Nederlands
Credietbank N.V., Kerdietbank S.A. Luxembourgeoise, and
Banque Gutzwiller, Kurz, Bungener S.A., previously filed
as Exhibit 10 to Registration Statement No. 33-10706 on
Form S-3, which is incorporated herein by reference.
10.6 Xr Capital Holding Trust Instrument between ICN
Pharmaceuticals, Inc. and Ansbacher (C.I.) Limited dated
as of September 17, 1986; Subscription Agreement between
Ansbacher (C.I.) Limited, ICN Pharmaceuticals, Inc., SPI
Pharmaceuticals, Inc., and Banque Gutzwiller, Kurz,
Bungener S.A. and the other financial institutions named
therein dated as of September 17, 1986; Bond Issue
Agreement between ICN Pharmaceuticals, Inc. and Ansbacher
(C.I.) Limited dated as of September 17, 1986; and
Exchange Agency Agreement between ICN Pharmaceuticals,
Inc., SPI Pharmaceuticals, Inc., Banque Gutzwiller, Kurz,
Bungener S.A., and the other financial institutions named
therein dated as of September 17, 1986 previously filed as
Exhibit 10.36 to Annual Report on Form 10-K for the fiscal
year ended November 30, 1987, which is incorporated herein
by reference.
114
117
10.7 Indenture dated as of October 30, 1986 between ICN
Pharmaceuticals, Inc. and Citibank, N.A.; and Subscription
Agreement dated as of October 8, 1986 between ICN
Pharmaceuticals, Inc., J. Henry Schroder Wagg and Co. Ltd.
and the other financial institutions named therein
previously filed as Exhibit 10.37 to Annual Report on Form
10-K for the fiscal year ended November 30, 1987, which is
incorporated herein by reference.
10.8 Pharma Capital Holdings Trust Instrument between ICN
Pharmaceuticals, Inc. and Ansbacher (C.I.) Limited, dated
as of October 16, 1986; Subscription Agreement between
Ansbacher (C.I.) Limited, ICN Pharmaceuticals, Inc. and
the Managers named therein, dated as of October 16, 1986;
Paying Agency Agreement between ICN Pharmaceuticals, Inc.,
Ansbacher (C.I.) Limited, Banque Paribas (Luxembourg) S.A.
and the other financial institutions named therein dated
as of October 22, 1986; and the Exchange Agency Agreement
between ICN Pharmaceuticals, Inc., Banque Paribas
(Luxembourg) S.A. and the other Exchange Agents named
therein dated as of October 22, 1986 previously filed as
Exhibit 10.38 to Annual Report on Form 10-K for the fiscal
year ended November 30, 1987, which is incorporated herein
by reference.
10.9 Bio Capital Holding Trust Instrument between ICN
Biomedicals, Inc., Ansbacher (C.I.) Limited and ICN
Pharmaceuticals, Inc. dated as of January 26, 1987;
Subscription Agreement between ICN Biomedicals, Inc.,
Ansbacher (C.I.) Limited, ICN Pharmaceuticals, Inc.,
Banque Gutzwiller, Kurz, Bungener S.A. and the other
financial institutions named therein dated as of January
26, 1987; Bond Issue Agreement between ICN Biomedicals,
Inc., ICN Pharmaceuticals, Inc. and Ansbacher (C.I.)
Limited dated as of January 26, 1987; Exchange Agency
Agreement between ICN Biomedicals, Inc., Banque
Gutzwiller, Kurz, Bungener, S.A., and the other financial
institutions named therein dated as of January 26, 1987;
and Guaranty between ICN Pharmaceuticals, Inc. and ICN
Biomedicals, Inc. dated as of February 17, 1987,
previously filed as Exhibit 10.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended February 28,
1987, which is incorporated herein by reference.
10.10 Public Bond Issue Agreement dated as of February 20, 1987,
between ICN Pharmaceuticals, Inc. and Fintrelex, S.A. and
the other banks named therein; Conversion Agency Agreement
dated as of February 20, 1987 between ICN Pharmaceuticals,
Inc., E. Gutzwiller & Cie, and the other financial
institutions named therein; and Escrow Agreement dated as
of February 20, 1987 between ICN Pharmaceuticals, Inc.,
Fintrelex, S.A. and E. Gutzwiller & Cie, previously filed
as Exhibit 10.2 to Registrant's Quarterly Report on Form
10-Q for the quarter ended February 28, 1987, which is
incorporated herein by reference.
115
118
10.11 License agreement dated as of January 1, 1987 between ICN
Pharmaceuticals, Inc. and SPI Pharmaceuticals, Inc.
regarding Brown Pharmaceutical Company, Inc. previously
filed as Exhibit 10.50 to Annual Report on Form 10-K for
the fiscal year ended November 30, 1987, which is
incorporated herein by reference.
10.12 Employment Agreement dated October 1, 1988 between ICN
Pharmaceuticals, Inc. and Milan Panic, incorporated herein
by reference.
10.13 Tax Sharing Agreement effective June 1, 1990 between SPI
Pharmaceuticals, Inc. and ICN Pharmaceuticals, Inc
incorporated herein by reference.
10.14 Asset Transfer Agreement between ICN Pharmaceuticals, Inc.
and SPI Pharmaceuticals, Inc. dated April 26, 1991
incorporated herein by reference.
10.15 1992 Employee Incentive Stock Option Plan, incorporated
herein by reference.
10.16 1992 Non-Qualified Stock Option Plan, incorporated herein by
reference.
10.17 Milan Panic Leave of Absence of Reemployment Agreement,
incorporated herein by reference.
11 Statement re computation of per share earnings.
22 Subsidiaries of the registrant.
23 Consent of Coopers & Lybrand.
116
119
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ICN PHARMACEUTICALS, INC.
Registrant
Date: March 30, 1994
By /s/ MILAN PANIC
------------------------------------------
Milan Panic
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ MILAN PANIC Chairman of the Board, March 30, 1994
- -------------------------- President and Chief
Milan Panic Executive Officer
/s/ JOHN E. GIORDANI Executive Vice President March 30, 1994
- -------------------------- Finance and Chief
John E. Giordani Finance Officer
/s/ NORMAN BARKER, JR. Director March 30, 1994
- --------------------------
Norman Barker, Jr.
/s/ ROBERT H. FINCH, ESQ. Director March 30, 1994
- --------------------------
Robert H. Finch
117
120
/s/ ADAM JERNEY Director March 30, 1994
- --------------------------------
Adam Jerney
/s/ WELDON B. JOLLEY Director March 30, 1994
- --------------------------------
Weldon B. Jolley
/s/ ROBERTS A. SMITH Director March 30, 1994
- --------------------------------
Roberts A. Smith
/s/ RICHARD W. STARR Director March 30, 1994
- --------------------------------
Richard W. Starr
/s/ ROGER GUILLEMIN, M.D., Ph.D. Director March 30, 1994
- --------------------------------
Roger Guillemin, M.D., Ph.D.
/s/ MICHAEL SMITH Director March 30, 1994
- --------------------------------
Michael Smith
118
121
EXHIBIT INDEX
Sequentially
Numbered
Exhibit Page
- ------- ------------
11 Statement re computation of per share earnings......
22 Subsidiaries of the registrant......................
23 Independent Auditors................................
119